EQT Reports Third Quarter 2012 Earnings

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EQT Reports Third Quarter 2012 Earnings

Production sales volume up 33% -- with a 2013 forecast of 30% sales volume growth

PITTSBURGH--(BUSINESS WIRE)-- EQT Corporation (NYS: EQT) today announced third quarter 2012 earnings of $31.9 million, or $0.21 per diluted share; compared to third quarter 2011 earnings of $67.6 million, or $0.45 per diluted share, excluding a gain on the sale of the Big Sandy pipeline. Third quarter 2012 earnings were negatively impacted by $0.03 in earnings per diluted share (EPS), from the resale of unused transmission capacity at prices below the contracted price. For the first time, the Company recorded a $4.8 million reduction in net income, or $0.03 in EPS, attributable to non-controlling interests in EQT Midstream Partners, LP. Operating cash flow was $176.2 million in the third quarter 2012, compared to $191.1 million for the third quarter of 2011. Cash flow per share was $1.18 in the third quarter 2012, compared to $1.28 in the third quarter 2011.


EQT's third quarter 2012 operating income was $85.8 million, compared to third quarter 2011 operating income of $134.8 million, excluding the Big Sandy gain. During the quarter, revenue from production and midstream sales volume growth was more than offset by a $44.3 million increase in depreciation, depletion and amortization expenses; as well as a 23% reduction in average wellhead sales prices to EQT Corporation. The 2011 results excluding the Big Sandy gain are non-GAAP financial measures and are reconciled in the Non-GAAP Disclosures section of this press release.

Highlights for the third quarter 2012 vs. third quarter 2011; and quarter-over-quarter 2012:

  • Production sales volumes were 33% higher, and 12.5% sequentially;
  • Marcellus production sales volumes were 85% higher, and 27% sequentially;
  • Midstream gathered volumes were 30% higher, and 12% sequentially; and
  • EQT average wellhead sales price was 23% lower.

Additional Highlights:

  • Increased 2012 production sales volume guidance to 257 Bcfe; and
  • Initiated 2013 production sales volume guidance of 335 Bcfe, a 30% increase over 2012

RESULTS BY BUSINESS

EQT Production

Driven by drilling in the Marcellus Shale, EQT Production achieved sales volumes of 68.2 Bcfe in the third quarter 2012, which was 33% higher than the third quarter 2011 and 12.5% higher quarter-over-quarter 2012. Sales volumes from the Marcellus averaged 451 MMcfe per day for the third quarter 2012, up from 243 MMcfe per day in the third quarter 2011, an 85% increase. The Company is increasing its full-year 2012 sales volume guidance to 257 Bcfe, 32% higher than 2011, and is initiating preliminary 2013 volume guidance of at least 335 Bcfe, 30% higher than 2012 forecasted volumes. The Company will provide more detailed guidance with the announcement of its 2013 capital budget in December.

Operating income for EQT Production was $38.3 million in the third quarter of 2012, compared to $98.9 million in the same period last year, while revenues for the quarter were $195.3 million, $12.2 million lower than the third quarter 2011. There was a 33% increase in sales volumes for the quarter; which was more than offset by a $1.17 per Mcfe decrease in realized price. The lower realized price resulted from a 33% decrease in average NYMEX natural gas price on our unhedged volumes, and a 40% decrease in average natural gas liquids price. Natural gas hedges contributed $75.1 million to revenues during the quarter. The Company realized an increase of $1.10 per Mcfe, due to its natural gas hedges, and a $0.66 per Mcfe premium over NYMEX natural gas prices resulting from production from its liquids rich acreage. EQT Production's sales volumes consisted of approximately 5% NGLs and oil, excluding ethane. Revenues, however, were reduced by $5.0 million due to selling unused transmission capacity that was not under long-term resale agreements, at prices lower than paid by EQT, in turn reducing the realized price by $0.07 per Mcfe.

For the third quarter 2012, operating expenses for EQT Production were $156.8 million, $48.2 million higher than the same quarter last year. Depreciation, depletion and amortization expenses were $41.3 million higher, primarily due to an increase in produced volumes and a higher unit depletion rate, which averaged $1.54 in the quarter. Other operating expenses were $6.9 million higher, consistent with the sales volume growth during the quarter. Per unit lease operating expense (LOE), excluding production taxes, decreased 18% to $0.18 per Mcfe.

The Company drilled (spud) 30 gross wells in the Marcellus Shale during the third quarter 2012, with an average length of pay of 5,840 feet. The Company drilled 100 Marcellus wells through the first three quarters and is on track to drill 132 wells in 2012.

EQT Midstream

EQT Midstream's third quarter 2012 operating income was $51.0 million, $9.3 million higher than the third quarter of 2011, excluding the Big Sandy gain. Net gathering revenues increased 22% to $77.0 million in the third quarter 2012, primarily due to a 30% increase in gathered volumes. Transmission revenues for the third quarter 2012 increased by $8.2 million, or 45%, from capacity charges associated with Equitrans expansion projects, including the Sunrise Pipeline, which was completed in July 2012. Net storage, marketing and other operating revenues totaled $5.4 million, a $7.0 million decrease, or $0.04 in EPS, due to unrealized losses on derivatives and inventory and lower liquids pricing. The Company expects that net storage, marketing and other operating revenues will total approximately $45 million in 2012.

Total operating expenses for EQT Midstream during the quarter were $57.9 million, $5.6 million higher than the same quarter last year, consistent with the growth of the business. Per unit gathering costs decreased 27% to $0.24 per Mcfe.

Distribution

Distribution had third quarter 2012 operating income of $0.7 million, compared to $2.5 million for the same period in 2011. Net operating revenues for the third quarter 2012 were $1.6 million lower primarily due to a favorable change in estimated recoverable costs during the third quarter of 2011. Operating expenses were flat year-over-year.

OTHER BUSINESS

EQT Midstream Partners, LP (NYSE: EQM)

On July 2, 2012, EQT Midstream Partners completed its initial public offering (IPO) of 14,375,000 common units at $21.00 per common unit. EQT received $231 million cash after the IPO, and retained a 57.4% limited partner interest in the partnership and a 2% general partner interest. For tax purposes, as a result of the IPO, EQT recognized a gain of approximately $110 million which results in additional cash taxes for 2012 of approximately $13.2 million. EQT Midstream Partners results are consolidated in EQT Corporation's results; and EQT Corporation recorded a $4.8 million reduction in net income, or $0.03 of EPS, attributable to non-controlling interest in the quarter. EQT Midstream Partners' results were released today and are available at www.eqtmidstreampartners.com. EQT Midstream Partners' earnings were ahead of plan and its adjusted EBITDA and distributable cash flow forecasts for the 12 months ending June 2013 were increased.

EQT Midstream Partners announced its first quarterly cash distribution of $0.35 per unit for the third quarter of 2012. The distribution will be paid on November 14, 2012 to all unit holders of record at the close of business on November 5, 2012.

Hedging

The Company added to its hedge position for the remainder of 2012 through 2015. The Company does not hedge produced liquids. The Company's total natural gas hedge positions for 2012 through 2015 production are:

 

2012**

 2013 2014 2015
Swaps
Total Volume (Bcf)321086251
Average Price per Mcf (NYMEX)*$4.71$4.75$4.61$4.70
Collars
Total Volume (Bcf)5252423
Average Floor Price per Mcf (NYMEX)*$6.51$4.95$5.05$5.03
Average Cap Price per Mcf (NYMEX)*$11.83$9.09$8.85$8.97
 

* The average price is based on a conversion rate of 1.05 MMBtu/Mcf

** October through December

Operating Income

The Company reports operating income by segment in this press release. Interest, income taxes and unallocated income/(expense) are controlled on a consolidated, corporate-wide basis and are not allocated to the segments. The Company's management reviews and reports segment results for operating revenues and purchased gas costs, net of third-party transportation costs.

The following table reconciles operating income by segment, as reported in this press release, to the consolidated operating income reported in the Company's financial statements:

 Three Months Ended

September 30,

 Nine Months Ended

September 30,

2012 20112012 2011
Operating income (thousands):
EQT Production$38,341$98,936$116,193$281,024
EQT Midstream51,021221,816166,907363,477
Distribution6852,46343,83164,758
Unallocated expenses (4,286) (8,231) (6,470) (20,693)
Operating income$85,761 $314,984 $320,461 $688,566 

Unallocated expense is primarily due to certain incentive compensation and administrative costs that differ from budget and are not allocated to the operating segments.

Price Reconciliation

EQT Production's average wellhead sales price is calculated by allocating specified revenues to EQT Midstream for the gathering, processing and transportation of the produced gas. EQT Production's average wellhead sales prices for the three and nine months ended September 30, 2012 and 2011:

 Three Months Ended

September 30,

 Nine Months Ended

September 30,

2012 20112012 2011
Revenues ($ / Mcfe)
Average NYMEX price$2.81$4.19$2.59$4.21
Hedge impact1.100.441.300.42
Average basis(0.03)0.08(0.01)0.15
Average net liquids revenue 0.66  1.11  0.78  1.12 
Average hedge adjusted price$4.54$5.82$4.66$5.90
 
Midstream Revenue Deductions ($ / Mcfe)
Gathering to EQT Midstream$(1.00)$(1.09)$(1.04)$(1.13)
Transportation and processing to EQT Midstream(0.19)(0.14)(0.18)(0.24)
Third-party gathering, processing and transmission (0.50) (0.57) (0.45) (0.48)
Total midstream revenue deductions$(1.69)$(1.80)$(1.67)$(1.85)
Average wellhead sales price to EQT Production$2.85 $4.02 $2.99 $4.05 
 
EQT Revenue ($/ Mcfe)
Revenues to EQT Midstream$1.19$1.23$1.22$1.37
Revenues to EQT Production 2.85  4.02  2.99  4.05 
Average wellhead sales price to EQT Corporation$4.04 $5.25 $4.21 $5.42 

Third-party gathering, processing and transmission rates included $0.07 per Mcfe for the third quarter 2012, reducing revenues by $5.0 million due to the sale of unused capacity on the El Paso 300 line that was not under long-term resale agreements, at prices lower than paid by EQT.

Unit Costs

The Company's unit costs to produce, gather, process, and transport EQT Production's produced gas:

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

2012 20112012 2011
Production segment costs: ($ / Mcfe)
LOE$0.18$0.22$0.19$0.21
Production taxes0.160.250.170.21
SG&A 0.35 0.30 0.36 0.31
$0.69$0.77$0.72$0.73
Midstream segment costs: ($ / Mcfe)
Gathering and transmission$0.32$0.39$0.34$0.36
SG&A 0.17 0.18 0.18 0.17
$0.49$0.57$0.52$0.53
Total ($ / Mcfe)$1.18$1.34$1.24$1.26
 

*Excludes the retroactive PA Impact Fee of $0.04 per Mcfe for the nine months ended September 30, 2012, for Marcellus wells spud prior to 2012.

Marcellus Horizontal Well Status (cumulative since inception)

 As of 9/30/12 As of 6/30/12 As of 3/31/12 As of 12/31/11 As of 9/30/11
Wells spud345318281248230
Wells online233214186159137
Wells complete, not online27223224
Frac stages (spud wells)*6,3905,4114,7473,7963,530
Frac stages online3,6043,2472,7492,1711,873
Frac stages complete, not online6224125133165
 

*Includes planned stages for spud wells that have not yet been hydraulically fractured.

NON-GAAP DISCLOSURES

Adjusted operating income, adjusted net income and adjusted earnings per diluted share

Adjusted operating income, adjusted net income and adjusted earnings per diluted share, are non-GAAP financial measures that are presented because they are important measures used by management to evaluate period-to-period comparisons of earnings trends. Adjusted operating income, adjusted net income and adjusted earnings per diluted share should not be considered in isolation or as a substitute for operating income, net income or earnings per diluted share. The table below reconciles adjusted operating income, adjusted net income and adjusted earnings per diluted share with operating income, net income and earnings per diluted share, as derived from the statements of consolidated income to be included in the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2012.

Reconciliation of Adjusted Operating Income:

 

Three Months Ended
September 30,

2011
Operating income as reported$314,984
(Deduct) / add back
Gain on disposition of Big Sandy (180,143)
Adjusted operating income$134,841

Reconciliation of Adjusted Net Income and Adjusted Earnings Per Diluted Share:

 

Three Months Ended
September 30,

2011
Net income as reported$178,914
(Deduct) / add back
Gain on disposition of Big Sandy(180,143)
Tax impact at 38.2% 68,815 
Adjusted net income$67,586
Diluted weighted average common shares outstanding150,301
Diluted EPS, as adjusted$0.45

Operating Cash Flow

Operating cash flow is a non-GAAP financial measure but is presented as an accepted indicator of an oil and gas exploration and production company's ability to internally fund exploration and development activities and to service or incur additional debt. EQT Corporation also includes this information because management believes that changes in operating assets and liabilities relate to the timing of cash receipts and disbursements, and therefore, may not relate to the period in which the operating activities occurred. Operating cash flow should not be considered in isolation or as a substitute for net cash provided by operating activities prepared in accordance with GAAP. The table below reconciles operating cash flow with net cash provided by operating activities, as derived from the statement of cash flows to be included in the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2012.

 Three Months Ended

September 30,

 Nine Months Ended

September 30,

(thousands)2012 20112012 2011
Net Income$36,704$178,914$140,185$388,923
Add back (deduct):
Deferred income taxes(7,584)86,39245,473190,330
Depreciation, depletion, and amortization131,61187,343354,817247,627
Gain on disposition of Big Sandy and Langley, net of current taxes(159,560)(166,657)
Other items, net 15,429  Read Full Story

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