EQT Plans to Control Own Destiny through Midstream Deal

EQT Corp. saw a miss on third-quarter production volumes due to third-party infrastructure—a situation that the company will look to remedy after it closes on its recent $5.2 billion upstream and midstream acquisition.

The U.S. gas producer saw its turn-in-wells (TIL) decline and its resulting fiscal year 2022 production guidance fall 2.5% to 1.95 Tcfe due to midstream and logistical constraints as well as weather events, Goldman Sachs analyst Umang Choudhary wrote in an Oct. 27 report. EQT’s planned net wells to sales are now expected to be about 72 wells, down from the company’s initial guidance of about 100 wells.

Solving Appalachia Constraints

Tudor, Pickering, Holt & Co. (TPH) analyst Jeoffrey Lambujon noted that due to its production miss, EQT’s capex beat expectations for the third quarter and for 2022.

“In Q3, ~16 TILs versus the guidance midpoint of ~27 drove production of 488 Bcfe, within guidance 475-525 but below TPH estimates/Street 502/500, with capex conversely beating expectations at $349 million versus guidance $350 million-$400 million and TPH estimates/Street $380 million/$387 million,” he wrote.

However, several analysts said that EQT’s $5.2 billion September deal to purchase THQ Appalachia I LLC (Tug Hill)’s upstream assets and THQ-XcL Holdings I LLC (XcL Midstream)’s gathering and processing assets will help to address those problems.

The Tug Hill assets will be helpful partly due to the “fact that we will control and operate the midstream. That’s going to give us much more operational control and the ability to mitigate any issues,” Toby Rice, EQT’s president and CEO, said on an Oct. 26 earnings call.

EQT has billed the integrated midstream assets as a way to increase operational control and drive “among the lowest FCF (free cash flow) breakeven cost structures in Appalachia.”

Mizuho Americas analysts Vincent Lovaglio and Silvio Micheloto noted that unexpected third-party infrastructure issues are a recurring issue for Appalachian operators. This is especially true during the shoulder season in a play that is hampered by takeaway constraints.

“EQT is taking steps to address these issues with the recent acquisition of XcL’s midstream assets alongside the Tug Hill acquisition, a step in the right direction in our view,” Lovaglio and Micheloto wrote. “And at strip pricing next year, less the company’s updated 2022 outlook for realizations, we still forecast roughly ~$3 billion of free cash flow generation in 2023. We maintain our Buy rating on EQT.”

Other Expected Benefits

Rice also noted in the earnings call that Tug Hill’s upstream assets are expected to lower EQT’s overall breakeven costs to $2.15/MBtu from $2.30 MBtu, which Rice said “adds further resiliency to our free cash flow profile to all parts of the commodity cycle.”

The company did not assume any synergies when it underwrote the deal, but highlighted an additional $80 million per annum of potential upside largely due to “greater competence in water system integration benefits.”

Rice added the deal remains on track to close in the fourth quarter, when EQT will provide pro forma guidance.

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In connection with the deal, EQT also raised by $1.5 billion its year-end 2023 debt reduction target of $4 billion. Year to date, the company has retired $830 million in debt.

EQT plans to also double its stock buyback authorization to $2 billion, according to Rice.

Securities laws prohibited EQT from repurchasing a significant amount of stock due to the Tug Hill transaction. However, after the deal was announced, EQT repurchased 3.6 million shares for $150 million in mid-September.

“Looking ahead, we still have approximately $1.6 billion remaining on our buyback authorization, providing significant dry powder to repurchase our shares at an extremely attractive valuation,” Rice said.

He noted that EQT was added to the S&P 500 in October, which he viewed as a testament to the company’s “premier asset base, excess of our modern, digitally enabled operating model and the overall sustainability of our business.”