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EQT Cuts 2015 Spending, Moves to Protect Cash Flow

With commodity prices showing no visible signs of life, EQT Corp. said Thursday it would scale back in its core operating areas, revising its strategy this year and announced a plan to cut spending by $450 million and release about three rigs in the coming weeks.

One of the top producers in the Marcellus Shale, it wasn't all bad news for EQT Corp., however, as it turned in another record year for natural gas sales growth. Production in the fourth quarter increased 33% from the year-ago period to 136.7 Bcfe, helping the company to exit 2014 with 476.3 Bcfe in total sales volumes. In 2013 the company produced 378.2 Bcfe (see Shale Daily, Feb. 13, 2014).

In December, EQT said it would increase this year's budget slightly to $2.5 billion from 2014, when it budgeted $2.4 billion (see Shale Daily, Dec. 8, 2014). But lower commodity prices that the company doesn't see changing anytime soon, and the prospect of declining cash flow prompted it to reduce this year's spending to $2.05 billion. In keeping with a stated goal of growing annual production by 20% or more, the company reiterated its 2015 production guidance of 575-600 Bcfe.

"We decided to lower our activity to more than match the decline in operating cash flow," said CEO David Porges. "In times of financial stress such as these, we think the prudent approach is to be conservative financially. Whatever happens over the course of the rest of the year from a financial perspective -- quicker recovery or slower recovery, the presence or absence of opportunities created by over-extended peers -- we believe we're better off with cash on hand, a strong credit position and a strong equity position."

Year-over-year 4Q2014 revenue increased 43% to $647 million, and full-year revenue was up 32% to $2.3 billion compared with 2013. But lower realized commodity prices, higher expenses and related impairment charges for its Ohio Utica Shale properties and its Permian Basin properties in West Texas led to a 4Q2014 net loss of $14.7 million (10 cents/share). That was down from a $115.2 million (75 cents/share) profit in 4Q2013.

Full-year 2014 net income was $387 million ($2.54/share), down from $390.6 million ($2.57/share) in 2013.

Steven Schlotterbeck, exploration and production president, said costs could come down this year as oilfield service companies reduce charges for completions, equipment, labor and other services amid the commodities downturn.

"These cuts do not assume service cost deflation," Schlotterbeck said of the company's budget and the extra cash that could come from new service contracts. "While we expect to realize significant service cost reductions, we are currently in negotiations with all of our suppliers and do not want to forecast specific savings until those negotiations are concluded."

EQT's current budget for exploration and production would still be higher than last year’s if its spending plans remain unchanged. In the Marcellus Shale of Pennsylvania and West Virginia, which accounted for 79% of 2014 production, EQT intends to cut the wells it had previously planned to drill by 59 to 122. In the Permian Basin, it will cut out 10 wells and drill only five to hold its acreage there. It also plans to reduce its rig count from the current 15 to 12.

But with its E&P budget up, production expected to increase and its firm transportation portfolio ready to handle those volumes, financial analysts were more concerned with how growth would be affected in 2016 if the commodities downturn persists and EQT is forced to further scale-back.

Porges said it's too early in the down cycle to predict "how the environment will play out," adding that if natural gas, natural gas liquids and crude oil prices don't budge by the end of 2015, the company could revise its production growth forecast lower.

"We have tried to position ourselves so that we could ramp-up significantly if need be, but we haven't really run through a variety of sensitivities in this kind of volatile market to give you a good answer about what the growth rate would be at different [New York Mercantile Exchange] prices," Porges said. "Over the course of the next few months, we'll probably run through those types of sensitivities and certainly share those if we do."

EQT's average realized prices for the fourth quarter were $3.79/Mcfe, or about 9% lower than the $4.17/Mcfe it earned in 4Q2013. The company expects this year's average Nymex differential to be up to negative 50 cents.

The company also said its planning to file a prospectus sometime this quarter to form a second master limited partnership (MLP) for EQT Midstream Partners LP (EQM), with an initial public offering expected to be launched sometime by the middle of the year. That MLP would own EQT's 2% general partner interest in EQM and also own EQT's 21 million common units.

"We do not believe the rapidly growing cash flows [of EQM] are being fairly valued in the EQT stock price," Porges said. "As we reviewed our alternatives to rectify that situation, we concluded that we wanted a vehicle that is publicly traded."

In November, EQT spud its first Utica Shale well in southwest Pennsylvania's Greene County (see Shale Daily, July 24, 2014). But during drilling of the lateral curve, the company encountered higher than expected reservoir pressures and realized that its rig was not rated to handle them. With the arrival of new equipment, that well will be delayed. Once complete, the company will conduct a second Utica Shale test this year in Wetzel County, WV, before deciding how and where to proceed with Utica drilling outside Ohio.

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