01—Abstract
Summary
Summary of the 10-K filed March 23, 1998. Cited figures are marked; the original filing is the authoritative source.
Equitable Resources, Inc. (EQT) reported 1997 net income of $78.1 milliona, or $2.17 basic EPS, up from $59.4 million ($1.69) in 1996, on operating revenues of $2.15 billion.
However, the headline figure is flattered by nonrecurring items: a $31.3 millionb after-tax gain from selling western U.S., Canadian, and contract drilling assets, offset by after-tax charges including an $8.5 million impairment on a bedded salt storage project and $6.7 million in corporate restructuring costs. Excluding these items, net income was $61.9 million ($1.73 per share), a 13% increase over 1996's adjusted $55.0 million. Operating income before nonrecurring items improved in the Supply & Logistics segment, which was helped by higher gas prices and a strategic refocus on Appalachian and Gulf of Mexico reserves.
The company is pivoting toward a more integrated model. It sold oil and gas properties in six western states and Canada for $170 millionc, used part of the proceeds to buy two producing Gulf of Mexico fields from Chevron, and acquired NORESCO, an energy services firm, for about $67 million in stock plus $10 million in cash. Its Services segment remains loss-making (operating loss of $10 million on $345 million of revenue), and the company's board authorized management in March 1998 to explore selling its Louisiana and Texas midstream operations, a transaction that could occur as early as Q3 1998.
Balance sheet metrics are stable but show more short-term borrowing: total assets rose to $2.41 billiond, long-term debt was roughly flat at $418 million, and short-term loans increased to $286 million. For investors, the key points are the dividend of $1.18 per share (unchanged for several years), a sizable proved reserve base of 890 Bcf of natural gas, the need to finance the 1998 capital program of about $169 million with operating cash flow and short-term debt, and a pending Trust Preferred offering of $125 million. Operating cash flow of $114 million in 1997 was weak compared with $280 million in 1995, largely due to working capital swings, and the company faces Year 2000 remediation costs it expects to be immaterial.
02—Key points
Key Highlights
- Net income of $78.1M ($2.17 basic EPS) in 1997, up from $59.4M ($1.69) in 1996, but includes a $31.3M after-tax gain from asset sales; excluding nonrecurring items, EPS was $1.73, up 13% year over year.
- Asset sales and portfolio reshaping: sold western U.S. and Canadian oil and gas properties for $170M and Union Drilling for $7M, and bought Gulf of Mexico fields from Chevron for $77.6M, shifting focus to Appalachia and the Gulf Coast.
- Acquired NORESCO (energy services) for 2.1M shares (~$67M) plus $10M cash, creating a Services segment with $345M in revenue but a 1997 operating loss of $10M and $68M of goodwill.
- Possible sale of Louisiana and Texas midstream operations under consideration since March 1998, potentially closing as early as Q3 1998.
- Proved natural gas reserves rose to 890 Bcf at year-end 1997 (769 Bcf proved developed), partly from a revision that extended Appalachian reserve life from 35 to 50 years and added 78.6 Bcfe.
- Liquidity is adequate but short-term borrowing rose: short-term loans reached $286M, with $500M of credit lines and a planned $125M Trust Preferred issue in 1998 to fund the $169M capital program.
- Quarterly dividend held at $0.295 per share ($1.18 annually), with $423M of retained earnings available for dividends under debt indenture restrictions.
03—Questions
Frequently Asked Questions
How did EQT perform in 1997 after excluding one-time items?
Reported net income of $78.1M ($2.17 per share) included a $31.3M after-tax gain on asset sales, partly offset by an $8.5M impairment charge and a $6.7M corporate restructuring charge. Excluding these items, net income was $61.9M ($1.73 per share), a 13% increase over 1996's adjusted figure of $55.0M.
What drove the company's strategic repositioning in 1997?
Management sold lower-return western U.S. and Canadian production for $170M and used part of the proceeds to buy producing Gulf of Mexico fields, concentrating exploration on the Appalachian and Gulf Coast regions. It also acquired NORESCO to build an energy services business, which remains loss-making, and in March 1998 authorized a plan to sell its Louisiana and Texas midstream assets.
Is the dividend at risk?
The dividend has been held at $1.18 per share annually since at least 1995, and management expects to keep paying it quarterly. Dividend payments were about $42.7M in 1997. Covenants in the debt indentures limit dividends, but $423M of retained earnings is currently available for distribution, so there is ample room.
Why did operating cash flow fall and how is capital spending being funded?
Operating cash flow was $114M in 1997, down from $280M in 1995, largely due to working capital needs in the regulated and marketing businesses. Capital spending was $253M in 1997 and is budgeted at about $169M for 1998. Management plans to fund that program with operating cash flow and short-term loans, and to issue $125M of Trust Preferred securities during 1998.
What are the main risks flagged in the filing?
Key risks include natural gas and oil price volatility, weather-driven utility demand (the 1997 residential volumes fell 7% after a mild winter), regulatory changes that let customers switch suppliers, a $20M-or-less Raytheon lawsuit tied to the Avoca, NY storage project, and competitive pressure in gas marketing and energy services. Management also notes the Services segment's start-up losses and a pending FERC rate case at Equitrans through 1998.
04—Continue