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Poor EQT Results Overlooked; Company's First Utica Well Shatters Records

EQT Corp.'s profits continued to decline in the second quarter, this time taking a significant slide on even lower commodity prices and overshadowing double-digit growth in the company's natural gas sales volume.

But the financial news was somewhat expected and brushed quickly aside during a conference call to discuss earnings that was dominated by the company's first Utica Shale well in Southwestern Pennsylvania. It shattered the Appalachian Basin's previous record and had financial analysts wondering if the formation could be given priority over the company's dominant assets in the Marcellus Shale any time soon.

For now, management said, the short answer is a resounding "no." The well was a beast. One that management called "the most technically challenging well" the company has ever drilled or completed, saying there was difficulty holding pressure back and warning that a steep learning curve remains for EQT in the costly deep dry gas Utica.

The well, located in Greene County, PA, underwent a 24-hour deliverability test to sales on Wednesday night. What happened, President of Exploration and Production Steven Schlotterbeck said, "far exceeded our expectations." The well averaged 72.9 MMcf/d with an average flowing casing pressure of 8,641 psi. That equates to a 24-hour initial production (IP) rate, per 1,000 feet of lateral, of 22.6 MMcf/d.

"To the best of our knowledge, this is the highest reported IP of any Utica well to date," Schlotterbeck said.

The next publicly announced Utica well that even comes close was Range Resources Corp.'s in nearby Washington County, PA, which had an average 24-hour peak production rate of 59 MMcf/d in December (see Shale DailyDec. 15, 2014).

EQT's well was flowed directly into sales off a Marcellus Shale pad, where management said no other wells were shut-in for the test. On Thursday, Schlotterbeck said the well was producing at 26 MMcf/d on cleanup, with 2,000 barrels per day of frack water. Going forward, the company plans to produce the well at a choke-controlled rate of 24 MMcf/d to manage proppant stress and monitor pressure declines to help determine an estimated ultimate recovery (EUR) and decline profile.

"We literally finished the deliverability test last night. The results were quite a bit in excess of our expectations. So I think it's a little premature for us to be thinking EURs," Schlotterbeck said when asked what the well could mean for the company's acreage in the region. "We're going to need to study it a little while. Given the 24 hours that we've seen, it's a very strong well and the pressures seem to be holding up very well. In fact, it's still cleaning-up. The pressure is actually still inclining a bit as the water production declines. It hasn't even really cleaned-up yet for us to get a good, clean data set."

The well was completed with 18 fracture (frack) stages on a 3,221 foot lateral. EQT used ceramic proppant. Earlier in the year, the company had said it was planning to drill five similar Utica wells this year. It is now only planning a second well in Wetzel County, WV, in the third quarter. Management has not ruled out a third Utica well this year, however.

After the Greene County test, EQT estimates that it can drill and complete similar Utica wells with up to 5,400 foot laterals for roughly $12.5 million each.

Beyond the distraction, EQT's second quarter net income fell precipitously to $5.5 million (4 cents/share) from $110.9 million (73 cents/share) in the year-ago period. That's also down from $173.4 million ($1.14/share) in the first quarter. While the company's second quarter production increased just 1.3% from the first quarter to 147.1 Bcfe, it was up 34% from the year-ago period. The decreases in its average realized prices dented that annual growth (see Shale DailyJuly 24, 2014).

"The story here continues to be growth in sales of produced natural gas, although that growth was overshadowed this period by lower commodity prices," said CFO Phillip Conti. "The significantly lower average realized price more than offset the volume growth."

The company reported that it earned $2.36/Mcfe in the second quarter, 40% lower than the $3.93/Mcfe it earned in the year-ago period. That was down from the first quarter as well, when the company reported an average realized price of $3.70/Mcfe. EQT also recorded $25.9 million in non-cash losses related to hedges during the period and took a $9.4 million asset impairment charge for the quarter.

While well costs have dropped 5% since April, the drop in profit and EQT operating revenues -- down to $243.6 million in the second quarter from $373.5 million in the year-ago period -- also prompted the company to again cut its capital expenditures budget. EQT said it would spend $100 million less for the remainder of the year and reset capital expenditures at $1.75 billion. It cut $150 million from its budget last quarter (see Shale DailyApril 23).

Conti said that about $30 million of the $100 million would be cut from exploration and production spending, with the rest of the savings going toward midstream gathering projects that are now expected to be undertaken next year.

A bright spot, however, was EQT Midstream Partners (EQM) LP, which has earnings consolidated with EQT's. Operating income at EQM was up 22% to $108.2 million from the year-ago period. That came from higher revenue that was driven in part by a 35% year-over-year increase in gathered volumes. 

EQT also increased its production guidance for the second time this year, scaling it from 585-600 Bcfe to 595-605 Bcfe. The company said it drilled 48 gross wells during the second quarter, including 38 in the Marcellus and 10 in the Upper Devonian.

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