EQT Can Generate Reasonable Long-Term Returns

Oil Refinery And Pipeline

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EQT Corporation (NYSE:EQT) is a large American energy company and natural gas company. The company has seen its share price recover substantially and the company’s continued production and low margins will enable substantial continued cash flow. The company will be able to use its cash flow to generate substantial returns, making it a valuable investment.

EQT Corporation Performance

EQT Corporation had a strong quarter, which will enable continued shareholder returns.

EQT Corporation Investor Presentation

EQT Corporation Investor Presentation

EQT Corporation produced 488 Bcfe in the quarter at an average realized price of $3.41 per Mcfe for roughly $1.6 billion in revenue. The company earned $974 million in adjusted EBITDA and spent $349 in capital expenditures with $591 million in FCF. The company managed to keep both operating costs and capital efficiency low.

EQT Corporation Bolt-On

The bolt-on acquisition shown in more detail below provides minimal but highly valuable acreage.

EQT Corporation Investor Presentation

EQT Corporation Investor Presentation

The most significant highlight for the quarter was the $5.2 billion bolt-on acquisition of Tug Hill and XcL Midstream at a breakeven price of <$3/MMBtu. That’s a massive purchase for the company getting it 90 thousand acres which is only a 10% increase in acreage. This quality acreage though is supposed to add 800 million cubic feet / day in production at 11-year reserve life.

More importantly, the 50% cash 50% equity is expected to rapidly lose the company’s overall breakeven. The transaction is expected to close by the end of the year.

EQT Corporation FCF Yield

Putting this together, the company has substantial FCF that it expects to grow rapidly.

EQT Corporation Investor Presentation

EQT Corporation Investor Presentation

The company’s $2 billion in 2022E FCF is expected to increase dramatically to roughly $3.8 billion in 2023E. That’s massive FCF for a $15 billion corporation. The company has $4.7 billion in net debt currently and it expects to turn that into a 1-1.5x long-term leverage target by YE 2023. That’s a level that the company should be able to comfortably reach.

That increasing FCF yield along with the company reaching closer to its debt targets (although it still plans to reduce debt by a further $3 billion) means that the company will be able to increase cash towards shareholder returns.

EQT Capital Returns and Planning

EQT is rapidly expanding its capital repurchase program.

EQT Corporation Investor Presentation

EQT Corporation Investor Presentation

The company is looking to repurchase open market debt at a discount, a strong move given the higher interest rate environment we’re currently in pushes down the prices on older debt. The company managed to reduce its 2026 convertible note principle, protecting shareholders while reducing debt. We expect the company to be able to comfortably execute here.

On the share repurchase side the company’s $2 billion authorization enables the reduction of ~12% of outstanding shares pro-forma to the acquisition or 80% of the new shares issued for the acquisition. The company has so far hit just under 20% of its target, at an average price roughly 30% below the current price, showing an intelligent approach.

We expect the company to continue repurchases opportunistically on the back of any market weakness. Overall, we expect debt plus share repurchases will combine to a double-digit return for shareholders.

EQT Balance Sheet

The company is focused on rapidly improving its balance sheet which will enable additional shareholder returns.

EQT Corporation Investor Presentation

EQT Corporation Investor Presentation

EQT Corporation has an incredibly strong balance sheet, although it’s clear that interest rates are going up and the company has debt that needs to be rolled over. The company’s recent $1 billion in debt issuance at a 3/6-year timeline has an interest rate of roughly 5.7% despite demand for the debt remaining strong.

The company managed to retire $830 million of debt YTD showing its financial strength but with higher single-digit rates for a lot of its debt, we’d like to see the company accelerate debt pay downs. Especially since debt that was once trading at a lower interest rate has since gone down in price as interest rates have risen.

Our View

Natural gas, for a while, was viewed as a tough and risky business in the United States, especially after Exxon Mobil’s overpriced acquisition of XTO Energy. However, in the last few years, that thesis has started to change. LNG has opened up a substantial market for exports and provided strong base layer demand for natural gas.

At the same time, natural gas demand remains strong, especially as it forms a lower emission fuel for the market when compared to coal. EQT Corporation represents one of the strongest natural gas companies in the industry and it has the ability to use that strength for substantial returns. The company recently made an opportunistic large acquisition for 50% stock and debt.

We expect the company to continue to maintain its dividend and then increase FCF substantially, both through asset cash flow growth, along with lower interest rates, debt pay downs, and share repurchases. That combination makes the company a valuable investment at this time.

Thesis Risk

The largest risk to the thesis here is that natural gas tends to be very volatile. The impact on local prices from the Freeport LNG shutdown is clear evidence of this. Natural gas is difficult and expensive to transport and that means that if local demand changes substantially, prices can fall very rapidly. That could hurt the company’s ability to return shareholder returns.

Conclusion

EQT Corporation is one of the world’s best positioned natural gas producers. The company has recently made substantial improvements to its balance sheet and its cost of debt has continued to go down. The company continues to have a reasonable dividend yield and it has been aggressively ramping up its share repurchase program.

The company is benefiting from a secular change. Europe needs to move away from Russian natural gas and U.S. natural gas represents a much safer and more reliable source of supply while not being particularly expensive to move. We expect that to drive substantial long-term growth for EQT Corporation enabling increased shareholder returns.

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