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Investors Yearning for Simplicity After EQT, Rice Tie-Up Breeds Natural Gas Juggernaut

EQT Corp. produced an astounding 4 Bcfe/d in December, its first full month of integrated operations after completing the acquisition of Rice Energy Inc. in a deal that gave rise to the nation’s largest natural gas producer.

However, the production results were not yet enough for investors struggling to wrap their heads around the complexity of the new Appalachian juggernaut. EQT is now reporting financial results through five business segments comprised of production and midstream assets that were previously owned by the company and those gained through the Rice acquisition.

Management has been working to untangle that web and address shareholder concerns that the stock is trading at a discount to the overall value of the parts that now make up the business. Since the Rice acquisition was completed in November, a committee has been working on recommendations for how best to do that.

CEO Steven Schlotterbeck said on Thursday during a call to discuss year-end results that the committee is ahead of schedule, with a plan to be unveiled at the end of February, one month earlier than scheduled. He said the plan would be implemented as quickly as possible.

Some investors have been pushing the company to separate its midstream and upstream businesses, but it is unclear what steps EQT plans to take. Nearly every financial analyst on Thursday’s call asked a question about the company’s “sum-of-the-parts” plan, or at least tried to get hints about it. Schlotterbeck and other executives had to side step those questions, saying answers about how the plan might affect share repurchases, dividends, midstream dropdowns, operations and other metrics would have to wait until after the announcement.

Management focused instead on the synergies that have so far been achieved through the Rice acquisition and other consolidation activity last year. The company absorbed Rice’s 252,000 net acres in Ohio and Pennsylvania in 2017, and it also acquired 110,000 net Marcellus acres. EQT now controls 680,000 core acres in the Appalachian Basin.

For the last three months, EQT has been busy “blending the best of two cultures” in an effort to combine operational efficiencies,Schlotterbeck said. The company “has hit the ground running,” with lateral lengths in southwestern Pennsylvania projected to average 13,600 feet this year, or more than 1,000 feet longer than initially expected when the company set out to acquire Rice.

“On the drilling side, we have set new footage records by combining the data, experience and practices of both companies, more specifically related to rotary steerable systems and drill pipe rotation,” added David Schlosser, president of exploration and production. “And finally, we’ve seen promising results from early testing of new concepts on the landing point of our Marcellus laterals.”

Selling, general and administrative savings from the Rice deal are estimated at $110 million this year, while capital efficiency savings are $210 million, the company said.

Despite analysts balking at what one called in a note to clients a “messy” post-merger earnings release, production, realized prices and spending were in line with Wall Street’s expectations.

EQT produced 294.4 Bcfe in the fourth quarter, up from 198.4 Bcfe in the year-ago period and from 205.1 Bcfe in 3Q2017. For the year, EQT produced 887.5 Bcfe, compared to 759 Bcfe.

The company expects volumes to average about 4 Bcfe/d in the first quarter, with operations on track for sequential growth throughout the year to reach targeted full-year production of between 1.520 and 1.560 Tcfe. 

Average realized prices in 2017 increased to $3.04/Mcfe from $2.47/Mcfe in 2016. They were up on cash settled derivatives, stronger natural gas benchmark prices,  a narrower natural gas differential and better liquids prices.

Midstream operations President Jeremiah Ashcroft said the Mountain Valley Pipeline (MVP) project remains on track to enter service in the fourth quarter. The company has filed 10 separate requests at the Federal Energy Regulatory Commission to proceed with construction and has so far received eight. Construction officially started last week, and the company expects to have the remaining authorizations to proceed with construction by the end of the month.

EQT Midstream Partners LP (EQM), he added, installed 36 miles of pipeline last year and placed into service four compressor units that added more than 43,000 hp of compression. About $425 million was spent on gathering, transmission and projects similar to MVP in 2017.

EQM plans to spend $1.5 billion this year on organic growth projects, with MVP set to receive the largest chunk. Ashcroft said construction also has started on the Hammerhead Pipeline, a $460 million gathering and header system designed to move 1.2 Bcf/d to MVP and the Ohio Valley Connector in West Virginia. Hammerhead is scheduled to enter service in 3Q2019.

EQT has 1.3 Bcf/d of firm capacity on the 2 Bcf/d MVP project. Schlotterbeck said the producer’s growth should be well served by its firm transportation portfolio in the coming years.

“I think we feel pretty comfortable with our takeaway position a bit beyond 2020, so probably into 2022 or 2023, before we think serious consideration needs to be given to greenfield takeaway projects,” he said. “Obviously, we have to start thinking about that years before those dates, but at this point, we feel like we’ve got a little time to get the Rice integration done, get the sum-of-the-parts plan behind us, assess the situation and then take a hard look at the next wave of takeaway capacity out of the basin.”

An increase in volumes and better commodity prices helped lift revenue, which was up to $1.1 billion in the fourth quarter from $379 million at the same time last year. For 2017, revenue was $3.4 billion, compared to $1.6 billion in 2016.

The company reported fourth quarter net income of $1.3 billion ($5.83/share), versus a net loss of $192 million (minus $1.11) in 4Q2016. The period included a $1.2 billion benefit from federal tax reform legislation that lowered the corporate tax rate.

For the full-year, EQT reported net income of $1.5 billion ($8.04), compared to a net loss of $453 million (minus $2.71) in 2016.

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