We maintain our neutral recommendation on EQT Corporation (EQT) following its impressive fourth-quarter 2010 results, significant resource potential in the Appalachia Basin, accelerating Marcellus growth trend as well as low-cost structure.
The company registered impressive fourth-quarter 2010 results, marked by higher production volumes, gathering & processing volumes and higher natural gas liquid (NGL) prices. However, the results were partially offset by the lower realized natural gas prices and storage, marketing and other net revenues.
As a pure Appalachian player, EQT holds a significant amount of natural gas resource potential in the basin. Consequently, we believe the company can prosper by entering into joint ventures and accelerating its drilling activities.
Moreover, the company remains well positioned in the Marcellus Shale given its high quality large acreage position as well as its low royalty burden. The improvement in EQT’s 3P reserves in the last quarter was backed by significant enhancement in its Marcellus Shale performance. Notably, EQT replaced 928% of its fourth-quarter production, which was mostly fueled by organic development activities in the Marcellus Shale.
Management’s continued focus on the Marcellus Shale was reaffirmed by its capital allocation program, where approximately 80% of 2011 drilling expenditures are planned with the remainder being for the Huron/Berea play. EQT also expects natural gas production sales volume of 175 billion cubic feet equivalents (Bcfe) for 2011. We expect the company to exceed its guidance aided by the low-risk and high-growth rate drilling locations in Huron and Marcellus Shale.
The company intends to fund its 2011 capex of $970 million with internal cash flow along with proceeds from asset divestitures. Recently, the company completed the sale of its Kentucky Langley processing plant to MarkWest Energy Partners L.P. (MWE) for $230 million. The transaction reveals EQT’s assurance to prioritize its capital allocation toward its exploration and production business, which generates a higher return.
EQT is a low-cost producer with a strategic midstream presence. The company registered low unit costs to produce, gather, process and transport its produced natural gas at $1.63 per million cubic feet equivalent (Mcfe) in the fourth quarter of 2010 compared with $1.64 per Mcfe in the year-ago quarter.
However, we believe EQT lacks geographical diversity in its asset base, as its resources are concentrated in the Appalachian Basin. Any potential disruption in the region will adversely affect the company’s results.
Again, the company remains highly exposed to volatile natural gas fundamentals and weak commodity prices, which might lead EQT to perform below our expectations.
EQT holds a Zacks #3 Rank, which translates to a short-term Hold rating.
EQT CORP (EQT): Free Stock Analysis Report
MARKWEST EGY PT (MWE): Free Stock Analysis Report
Zacks Investment Research
