Record first quarter production was not enough to offset the steep decline in natural gas prices for EQT Corp., which saw its year-over-year earnings decline 10% and its costs increase with property impairment charges and rig termination fees.
The company said Thursday it would again cut its exploration and production budget by $150 million to $1.9 billion to reflect a reduction in service costs.
Management also said it decided in March to suspend its Permian Basin operations in response to weak oil prices. EQT entered West Texas last year in an asset swap with Range Resources Corp., where management said its recent activity was already nearly at a standstill to hold leases (see Shale Daily, May 1, 2014). Executive Vice President Steven Schlotterbeck said the company is letting many of its Permian leases go and instead reducing its development rights to 700 upper Wolfcamp Shale acres.
"It's always a tough decision to let leases expire, but we think in this environment, that's a prudent economic decision," he told analysts during a conference call to discuss first quarter earnings.
Schlotterbeck said that declining service costs would eventually result in a 10-15% cost reduction per well, but he added that much of that is prospective until rig costs come down, with immediate savings for now coming on cheaper pumping services.The company said in February it would release three rigs this year.
"Most of our rigs are under longer-term contracts that don't expire this year. We have relatively little leverage in that area," he said. "...If soft prices continue into next year, or the year after, we'll be in a position to benefit from lower rig costs, but for now we're not."
EQT produced 145.2 Bcfe in the first quarter, up 37% from the 106.1 Bcfe it produced in the year-ago period and up 6% from the fourth quarter when it produced 136.7 Bcfe. Natural gas liquids accounted for about 9% of its production last quarter. Better than expected production prompted the company to increase the low end of its full-year guidance from 575-600 Bcfe to 585-600 Bcfe.
Most of its volumes came from the Marcellus Shale in Pennsylvania and northern West Virginia. CEO David Porges said the company's first deep dry gas Utica Shale well in southwest Pennsylvania is still not completed. The company has been at work on the well, located in Greene County, for about seven months now (see Shale Daily, July 24, 2014). Earlier this year, EQT said it encountered higher than expected reservoir pressures during drilling of the lateral curve (see Shale Daily, Feb. 5).
The company had to bring in a larger rig, and it now expects to begin stimulating the well in June. EQT had also planned to drill the lateral up to 4,500 feet but instead stopped short at 3,300 feet to avoid more problems. Management said it's considering different completion designs that could help lower the cost of each Utica well it drills, which is now estimated at $12-17 million. Porges said another four Utica wells could be drilled this year.
"We need to define what the type curve, the decline curve really looks like to define the economics," he said. "Our view is it will be a minimum of a year's worth of actual production data before we'll have enough comfort to shift any significant amount of capital away from the Marcellus to the Utica."
EQT's average realized commodity prices continued to fall last quarter. Prices dropped to $3.70/Mcfe from $5.51/Mcfe in the year-ago period. First quarter prices also dropped from $3.79/Mcfe in the fourth quarter. Costs increased as well, EQT took a $13 million writedown on its properties in Ohio's Utica Shale and the Permian Basin, while it paid about $11 million in rig termination fees.
Net income dropped from $192.2 million ($1.26/share) in 1Q2014 to $173.4 million ($1.14/share) last quarter. It was up from a net loss of $14.7 million (minus 10 cents/share) in the fourth quarter, when lower commodity prices, higher expenses and related impairment charges in Ohio and Texas held back profits. Revenue increased, however, to $709 million from $662 million in the year-ago period on higher production.