10-QPeriod: Q3 FY2009

EQT Corp Quarterly Report for Q3 Ended Sep 30, 2009

Filed October 29, 2009For Securities:EQT

Summary

EQT Corporation's third quarter 2009 results showed a significant year-over-year decline in net income, primarily driven by lower commodity prices impacting revenue and increased share-based compensation expenses. While production volumes increased across segments, particularly in EQT Production and EQT Midstream, this was insufficient to offset the revenue decline due to a substantial drop in average well-head sales prices. The company's financial condition remained solid, supported by strong operating cash flows and a substantial increase in long-term debt due to a significant notes offering. Investing activities saw a decrease in capital expenditures compared to the prior year, reflecting a focus on completing existing projects and a more cautious approach to new investments. The Distribution segment showed improvement due to approved base rate increases. Investors should note the impact of fluctuating commodity prices on revenue and the company's ongoing hedging strategies to mitigate this risk. The increase in share-based compensation expense, particularly related to the 2009 Shareholder Value Plan, is a notable item affecting profitability in the current period. The company's long-term strategy remains focused on organic growth through drilling and infrastructure expansion in the Appalachian Basin.

Financial Highlights

42 data points
Beta

Net Income

$2.91M

EPS (Diluted)

$0.02

Total Assets

$5.69B

Cash & Equivalents

$192.50M

Free Cash Flow

-$112.18M

Financial Statements
Beta
SG&A Expenses$59.91M
Operating Expenses$178.43M
Operating Income$39.93M
Interest Expense$32.39M
Net Income$2.91M
EPS (Basic)$0.02
EPS (Diluted)$0.02
Shares Outstanding (Basic)130.85M
Shares Outstanding (Diluted)131.50M

Key Highlights

  • 1Net income for the third quarter of 2009 significantly decreased to $2.9 million ($0.02/share) from $96.2 million ($0.73/share) in the prior year period, mainly due to lower commodity prices and higher share-based compensation expenses.
  • 2Operating revenues for the third quarter decreased by 26.7% to $218.4 million from $297.8 million year-over-year, driven by a substantial drop in average well-head sales prices across segments.
  • 3EQT Production reported a 24.7% decrease in operating revenues, despite a 18.5% increase in total sales volumes, due to a 36.8% decline in average well-head sales price.
  • 4EQT Midstream's net operating revenues increased by 22.9% to $87.5 million, driven by higher gathering volumes and transmission activity, though overall operating revenues decreased due to lower purchased gas costs.
  • 5The Distribution segment reported a 13.1% increase in net operating revenues to $25.3 million, primarily due to approved base rate increases in Pennsylvania.
  • 6Net cash provided by operating activities for the nine months ended September 30, 2009, increased to $552.6 million from $326.9 million in the prior year, benefiting from changes in working capital and a significant income tax refund.
  • 7Capital expenditures for the nine months ended September 30, 2009, decreased by 33.9% to $645.5 million compared to $985.8 million in the same period of 2008, reflecting the completion of major projects and a reduced spending plan.

Frequently Asked Questions

The primary drivers for the significant decrease in net income were lower commodity prices, which reduced operating revenues, and an increase in share-based compensation expense. Specifically, the reversal of compensation expense in Q3 2008 related to the 2005 Executive Performance Incentive Program (due to unfavorable market conditions impacting share price) was a favorable one-time event, while the current period saw increased expense for the 2009 Shareholder Value Plan due to improved performance metrics.

EQT Corporation utilizes a comprehensive hedging program involving derivative commodity instruments such as futures contracts, swap agreements, and collar agreements. The objective of this program is to protect earnings and ensure adequate returns on investments by mitigating the impact of fluctuations in natural gas and natural gas liquids prices. The company had price protection for approximately 60% of expected natural gas production sales volumes in 2009.

The EQT Production segment is focused on organic growth through horizontal drilling in the Huron and Marcellus shale formations in Kentucky, West Virginia, and Pennsylvania. Capital expenditures are primarily directed towards expanding reserves and production through these drilling programs and exploring new development plays. The company drilled a significant number of wells in the first nine months of 2009, with a focus on horizontal wells.

EQT Corporation significantly increased its long-term debt during the period by issuing $700 million in Senior Notes in May 2009, which were used to repay short-term borrowings and fund its capital program. The company's liquidity remains strong, with $192.5 million in cash and cash equivalents at the end of the quarter. The revolving credit facility, while impacted by Lehman Brothers' bankruptcy, had no outstanding borrowings as of September 30, 2009, and the company remained in compliance with all debt covenants.