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Marcellus Gives Big Boost to EQT 1Q Earnings

EQT Corp. CEO David Porges said the company was "off to a good start" in 2011, but he conceded that more work needed to be done to satisfy shareholders and to meet its strategic challenges.

"Our longer-term goal is to achieve organic volumetric and cash flow growth north of 30% per annum in production and associated cash flow growth in the midstream," Porges said during an earnings conference call Thursday. He added that he wanted the company to do this "while living within operating cash flow -- that is, without proceeds from asset sales."

Porges said Pittsburgh-based EQT should be able to meet its volume and cash flow goals by 2014, provided the company outspends cash flow by $300-400 million a year for the next three years.

EQT said it made $122.3 million during 1Q2011 and that production sales growth exceeded 30% for the fifth consecutive quarter, thanks largely to horizontal drilling in the Marcellus Shale.

"So far this year we have spud 23 wells with an average length of 4,775 feet, nearly 15% longer than our forecasted average length," CFO Philip Conti said. "We continue with implementation of our new frack geometry design experiment. So far we have completed 13 Marcellus wells with the new frack geometry; eight of the 13 wells are producing; four wells are shut in waiting on pipeline construction and one well should be turned on later this week."

EQT Production's sales volume for 1Q2011 was 43 Bcfe, a 43% increase from a year ago and 11% higher than 4Q2010. Marcellus Shale wells accounted for about 37% of the sales volume, up from the 13% share the play contributed in 1Q2010. Daily sales from Marcellus wells averaged 178 MMcf/d during 1Q2011, but EQT predicts that figure will climb to 280 MMcf/d by the end of 2011. The company also said it estimates production sales volumes will total 180 Bcfe in 2011, up 34% from all of 2010.

Senior Vice President Steve Schlotterbeck declined to go into specifics on the company's new drilling techniques, when asked by a financial analyst.

"We're still not ready to talk about the specifics, [but] typically a 5,300-foot length of well with the new design is quite a bit more expensive, probably about a million dollars more expensive," Schlotterbeck said. "So while we are clearly seeing higher production rates initially, it's very important that we get a little longer production history so we can accurately calculate the return we are getting for that extra million dollars."

According to Schlotterbeck, the company has five wells with more than 100 days of production using the new technique. He said those wells were averaging slightly more than 60% of a higher production rate versus standard drilling techniques.

"The results are very encouraging, but it's going to be closer to the end of the year before we talk in more detail about it," Schlotterbeck said.

The company's bottom line was also boosted by the sale of its natural gas processing complex in Langley, KY, to MarkWest Energy Partners for $230.5 million on Feb. 1. EQT realized a $22.8 million pre-tax gain on the transaction (see Shale Daily, Jan. 5).

"The sale of the Kentucky processing complex and other of our efforts along these lines have sharpened our view that at least some of our midstream assets, especially, are more valuable to others than they are to us -- at least, when the value to us is measured by inferring what the equity market is giving us credit for in our stock price," Porges said.

EQT said its earnings for the quarter were $34.2 million higher than 1Q2010, a nearly 39% increase. Operating cash flow climbed to $249.1 million in 1Q2011, up 22% from the first quarter last year. Reported earnings were 82 cents/share for the quarter, up 17 cents from the 65 cents/share fetched in 1Q2010, a 26% increase.

"Increase in cash flow comes as a result of another outstanding operational quarter across all three of EQT's business units," Conti said, adding that the company had record natural gas sales and transmission volumes, low per-unit development and operating costs for production, low per-unit costs in the midstream and solid operating income at Equitable Gas.

Addressing the discussion of "the pros and cons of shale gas development," Porges said the industry "has been taking these issues seriously, especially recently, and that while the speed of the ramp-up has caused some issues for some of our peers, the industry is generally very committed to improving and sharing best practices and working cooperatively with regulators to make sure that we achieve the promise of this great economic development opportunity."

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