As EQT Corp. marks its eighth consecutive quarter of natural gas sales growth, the company is barreling ahead in the Marcellus Shale. Wednesday CEO David Porges told financial analysts that EQT's Marcellus economics are better than previously thought and the prospect of increased regulation and a severance tax in Pennsylvania are not a threat.
"At EQT production we posted our second consecutive quarter of 31% year-on-year growth in sales of produced natural gas," Porges said during a second quarter earnings conference call Thursday. "This growth was again driven by horizontal drilling in our Marcellus and Huron/Berea plays."
The company's Marcellus economics have improved in the production and midstream areas, Porges said. At the wellhead drilling costs and well completion effectiveness are improving, due in part to EQT's use of extended laterals, he said. The increase in well length reduces the estimated development costs to approximately 73 cents/Mcfe; a 10% improvement in productivity, EQT said.
In the midstream, costs for gathering and processing have been "sharply reduced," thanks in part to pad drilling with multiple wells, which allows for more efficient connection of wells to the gathering system.
While EQT had previously estimated midstream costs of about $1.98/Mcf were necessary to support Marcellus development, the company now thinks it can accomplish what it needs to at about $1.29/Mcf, Porges said.
"So applying the lower cost of development and lower midstream costs, the Marcellus economic return estimates have been revised upward. We now expect to earn a 63% all-in after-tax return, on average, assuming a flat $6/MMBtu Nymex [New York Mercantile Exchange]. This is double our previous projections. Importantly, at $4 Nymex we can earn a 23% after-tax return."
EQT second quarter earnings of $30 million were 13% higher than the $26.6 million earned in the second quarter of 2009. Operating cash flow was $112.6 million; 17% higher quarter-over-quarter. Earnings were 20 cents/share for the second quarter, unchanged from the year-ago quarter.
The company's production unit achieved sales of produced natural gas of 31.9 Bcfe, representing a 31% increase quarter-over-quarter, driven by horizontal drilling in the Marcellus and Huron/Berea plays. Approximately 45% of EQT's sales of produced gas came from horizontal shale wells, up from 28% in the second quarter last year. Daily production from Marcellus wells averaged 55 MMcf/d for the second quarter and is expected to exceed 140 MMcf/d by year-end 2010.
The average wellhead sales price was $3.10/Mcfe; 14% lower than the $3.59/Mcfe realized in the year-ago quarter as a result of lower hedge gains for the quarter, partially offset by higher Nymex prices for unhedged natural gas sales.
The company drilled 164 gross wells during the second quarter. Of these, 128 were horizontal; 87 targeting the Huron/Berea play with an average length of pay of 3,920 feet; and 41 targeting the Marcellus play with an average length of pay of 3,700 feet. The company also drilled 23 vertical wells in its coalbed methane play.
EQT increased its hedge position in the second quarter for October 2010 through September 2015. The new hedges, covering approximately 19 MMcf/d of gas sales volumes, were collars with a floor of $5.32/Mcf and a ceiling of $7.35/Mcf.
While the company has "an immense resource base" and favorable economics, capital for building out midstream operations is in short supply. EQT would rather spend money on drilling than midstream, so prospective midstream partners are welcome to call.
Porges said midstream development to move third-party gas offers an attractive investment opportunity for "other peoples' money." Further, large midstream buildouts in the company's Huron/Berea and coalbed methane plays are not likely to be funded by EQT, which intends to pursue development in these areas that offers "lower midstream intensity."
Following in the steps of Range Resources Corp. -- which earlier this month said it would publicly disclose the chemicals contained in its hydraulic fracturing fluid (see Daily GPI, July 15) -- Porges said EQT would be doing the same on its website.
While fears of groundwater contamination from hydraulic fracturing have spawned talk of moratoria on new well permits, Porges said EQT hasn't heard much of that in the areas of Pennsylvania and West Virginia where it operates.
"We hear much more about disclosure issues and other forms of regulations," he said. "But frankly, in the other forms of regulation, our attitude is that from what we can tell, we are already operating in a manner that is consistent with the preliminarily proposed regulation. So in a way it's actually positive for us if the bar gets raised a little bit closer to the level that we're already at."
As for a severance tax on gas production -- which Pennsylvania lawmakers have agreed to but not determined yet (see Daily GPI, July 2) -- "we're actually proponents of the notion of Pennsylvania instituting a severance tax in the context of a broader clarification of rules regarding natural gas development," Porges said.
More specifically, EQT would like to see pooling rules that are more in line with those in the rest of the country, he said (see Daily GPI, July 26). Also, clarification on the deductions allowed for midstream costs with regard to the calculation of taxes and royalty payments would be nice, he said.
"We also believe it is in our best interest, though, that any severance tax would divert a fair amount of the money to the localities that incur the inconveniences that do in fact come along with drilling as opposed to going to the state capitol," Porges said. That's something that Pennsylvania's governor has called for as well (see Daily GPI, July 14; July 7).
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