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Growing Pains for EQT as Costs Soar, More Execs Depart

EQT Corp. on Thursday said it would cut its 2018 production guidance and increase spending after a frenzied stretch of drilling in the wake of its Rice Energy acquisition put stress on its supply chain, logistics, pad operations and sent costs soaring.

It was an ugly day for the company on Thursday as its stock plunged nearly 13% amid a poor third quarter earnings report and further management changes that haven’t ceased since former CEO Steven Schlotterbeck departed March over a disagreement with the board about his compensation. His departure came ahead of an elaborate plan to simplify the corporate structure and split the midstream and upstream segments. The split remains on track for next month.

“We do understand that this quarter’s operational update is a disappointment to shareholders,” said CFO Robert McNally, who will take over as CEO once the separation is complete. “It’s certainly a disappointment to me and this team as we underperformed our asset base in 2018. As incoming CEO, I’m committed to reshaping our culture to one that’s focused on capital efficiency and per share returns as opposed to purely chasing volume targets.”

EQT said Thursday general counsel Lewis Gardner, President of Exploration and Production David Schlosser and chief investor relations officer Patrick Kane had all “stepped down from their positions.” Replacements were announced. The personnel changes came not just after Schlotterbeck’s departure earlier this year, but after Jerry Ashcroft, who had been announced to lead the new midstream company, abruptly left the company in August.

Inclement weather and midstream delays during the first quarter disrupted the company’s drilling schedule, said Erin Centofanti, who was appointed executive vice president of production following Schlosser’s departure. That was followed by the most active period in the company’s history, when it ran 15 rigs and 12 fracture (frack) crews, stretching resources in the second quarter.

“The first six months of 2018 represented a tight market for Appalachian frack crews, resulting in higher pricing,” Centofanti said. “The same phenomenon was present in our water-hauling operations, where increased demand for trucks, a shortage of qualified drivers and new safety requirements for all haulers increased water-hauling costs.” McNally added that the company had as many as 500 trucks on the road each day at one point this year.

The growing pains became evident after the $8 billion acquisition of Rice last November, which transformed EQT into the nation’s largest natural gas producer.

“With the Rice acquisition, we all of the sudden found ourselves with a land position that gave us the opportunity to go from 8,000-foot laterals to almost 14,000 feet,” McNally said. Mixed in were about 20 “ultra-long laterals” between 15,000 and 20,000 feet, he added.

That presented a costly learning curve that helped prompt a $300 million increase in capital expenditures (capex). Investors, Tudor, Pickering, Holt & Co. analysts noted, currently  “have little tolerance” for such increases,  “particularly in the gas space.”

McNally said the longer laterals present “a whole new set of challenges,” pushing rigs to the limit of their capabilities and in “hindsight, we probably tried to drill too many of those ultra-long laterals.”

Going forward, the company plans to take a more measured approach, management said. Having already reined in activity, wells also would be drilled between 12,000 and 15,000 feet next year as the company learns how to better develop the longer ones.

The company is tentatively planning a capex budget of $2-2.2 billion next year to produce between 1.470-1.510 Tcfe. Formal guidance will be released later this year. In the meantime, 2018 production guidance has been cut by 30 Bcfe to 1.460-1.480 Tcfe.

EQT produced 374.2 Bcfe during the third quarter, up from 205.1 Bcfe in 3Q2017, when it had yet to close on the Rice acquisition. Sequentially, production was up from 362.5 Bcfe in 2Q2018.

The realized natural gas price was flat at $2.76/Mcfe during the third quarter, compared with the year-ago period as a decrease in the average New York Mercantile Exchange price net of cash settled derivatives was offset by an improvement in the average gas differential. Revenue was still up, however, on higher sales volumes, reaching $1.2 billion, compared with $659.4 million in 3Q2017.

EQT reported a net loss of $39.7 million (minus 15 cents/share) for the third quarter, compared with net income of $23.3 million (13 cents) in 3Q2017. The net loss was primarily from higher operating costs, including a charge of $259.3 million on capacity contracts related to the sale of Huron formation assets to Diversified Gas & Oil plc.

 

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