EQT Corp. is raising its guidance by another 10 Bcfe this year after strong first quarter results, guidance that will hinge on its Marcellus Shale assets in Pennsylvania, which management said remains the natural gas powerhouse’s top prospect.
Although the company dropped three rigs during the quarter and will drill fewer wells this year, its capital expenditures budget remains unchanged. EQT is now guiding for 1.480-1.520 Tcfe of production this year, the bulk of which will come from its core acreage in Pennsylvania.
CEO Robert McNally said during an earnings call on Thursday that the company’s assets in the state remain its best, while those in Ohio will continue to play a secondary role. Restrictive deep well spacing regulations and more stringent pooling laws in West Virginia find assets there lower in the company’s priorities. The state is set to receive just $155 million of the company’s $1.4 billion drilling and completions budget this year, while Pennsylvania would receive more than $1 billion and Ohio $235 million.
After spending months defending the company’s direction in the face of efforts to take over the company led by Rice Energy Inc. co-founders Toby and Derek Rice, management went on the offensive on Thursday to tout its Marcellus results. McNally highlighted “tangible signs” that management plans are moving the company forward in the wake of its $8 billion acquisition of Rice Energy in 2017, which transformed it into the nation’s largest natural gas producer.
EQT beat its guidance for the first quarter, while at the same time versus a year ago improved drilling days by 25%, increased hydraulic fracture stages/crew by 30% and pushed laterals longer. Since most of the executive management team took over late last year, McNally has led a push to cut costs, optimize results and generate more free cash flow after a shaky stretch following the growth spurt that came with the Rice acquisition.
As part of those efforts, EQT managed to negotiate a “penalty-free, early reduction” of its horizontal rig count, subletting three rigs that would have built a backlog of wells in 2019. The company is now running seven rigs, a target it had originally aimed to meet in the third quarter. As a result, 30 fewer wells will be drilled this year and another 10 wells will be completed instead. The scheduling changes, along with the guidance beat, won’t impact capital expenditures, but they are expected to improve efficiency next year.
McNally said more wells will be ready to turn inline in 2020, requiring little capital at the time. While EQT’s five-year plan hasn’t been updated, McNally said the efficiencies and savings are likely to help results in the long-term.
The company wrestled with supply chain, logistics and pad issues late last year and was forced to temper its plans for ultra-long laterals because of operational challenges. The company is still boosting its horizontal lengths, but at a more measured pace to gain efficiencies. During the first quarter, the company drilled 17 wells with total curve and lateral footage of more than 14,000 feet in one run. McNally said productivity had yet to decline with longer laterals.
He attributed the improvement in drilling days to “the simplification of our wellbore geometries, the fine tuning of procedures, mud properties and bottom hole assembly design.”
Part of the plans announced in January to cut costs and create more shareholder value in the face of the Rice challenge included optimized water handling processes, fleet rationalization and other drilling and completion process changes that became more evident during the first quarter. While the results were largely in line with the market’s expectations, financial analysts seemed to view them as proof the company is starting to execute and gain capital efficiencies in the process.
EQT produced 383 Bcfe during the first quarter, up 13% from the year-ago period adjusted for divestitures. The volumes were down from 394 Bcfe in 4Q2018, but the company beat its 360-380 Bcfe guidance for the period.
“The beat on production was largely driven by improved winter operations and was specifically attributable to a more collaborative and proactive approach to water handling,” McNally said, referring to management's efforts to smooth out logistics for its operations across a large footprint in Appalachia.
The company reported first quarter net income of $191 million (75 cents/share), compared with a year-ago loss of $1.6 billion (minus $5.96). Revenue declined slightly to $1.1 billion from $1.3 billion in part on lower realized prices.
Meanwhile, the Rice brothers continued to wage their proxy campaign, filing a lawsuit in Pennsylvania on Thursday. Claiming the company has underperformed, the Rice brothers stepped forward last year with the goal of installing a new management team, shaking up the board and having Toby take over as CEO. They’ve nominated nine board candidates who back their vision for a vote at EQT’s annual shareholder meeting on July 10.
The new complaint alleges that EQT is trying to undermine the brothers’ efforts to takeover the company by requiring that their board candidates be listed on the company’s proxy materials. The Rices want their nominees on a separate proxy card or a universal proxy card.
“The Rice team believes that this coercive tactic by EQT is designed to preserve the incumbent directors’ majority control of EQT by creating the deceptive appearance that the Rice team’s nominees support the incumbents, when in fact they do not,” the brothers said.
EQT said in response that its board was in the process of reviewing the Rice nominees and would make a recommendation to shareholders at the appropriate time. The company called the lawsuit an “unconstructive attempt to distract” from its solid first quarter results.