No url to add. Fitch news release below about EQT is from my brokerage account feed.
(No position, long or short, in EQT stock or options. Follow important news about the company as an owner of mineral interests in 7 of their wells on 5 different leases.)
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<Fitch Ratings-Chicago-20 June 2017: Fitch Ratings has affirmed EQT Corporation's (NYSE: EQT) Long-Term Issuer Default Rating (IDR) and senior unsecured notes at 'BBB-'. The Rating Outlook is Stable.
Acquisition Credit-Neutral Near-Term: Fitch believes that the EQT's announced acquisition of Rice Energy Inc. (RICE) offers potential credit upside in the medium- to long-term through the establishment of a dominant position in the prolific Marcellus Shale. However, near-term risks around U.S. natural gas fundamentals, benchmark pricing, and EQT price realizations net of transportation costs could pressure margins at EQT despite a significant increase in production volumes.
KEY RATING DRIVERS
Significant Production Increase: On a near-term basis, the transaction will materially increase EQT's production size (by approximately 1.3 bcfe/d), with pro forma 2017 combined production of approximately 3.6 bcfe/d, making EQT the largest U.S. natural gas producer. RICE assets are within a core area of the Marcellus and are largely contiguous with EQT acreage. This should provide substantial benefits for the combined entity, including the ability to drill longer laterals and improve well economics, increased optionality regarding rig allocation, and corporate G&A synergies. EQT shareholders will own 65% of the combined company, and RICE will nominate two directors to the EQT board.
Balanced Funding Mix: Funding includes a significant equity component, at approximately $5.2 billion, and debt/EBITDA is expected to decrease in out-years on both a consolidated and parent-only basis after an uptick in 2017 driven by the timing of the acquisition. Decreases in forecasted leverage are primarily driven by an increased outlook for production volumes from the combined entity, as well as modest uplift from Fitch's natural gas price deck, which increases from $2.75/mcf in 2017 to $3.25/mcf in 2020. Fitch notes that retained midstream assets at RICE, with 2018E EBITDA of approximately $130 million, are candidates for dropdown to EQT Midstream Partners, LP (EQM), providing additional liquidity and de-leveraging options for parent EQT.
Effective Basin Consolidation Strategy: Pro forma for the RICE acquisition, EQT is well positioned with 1 million total net acres in the Marcellus shale. Fitch expects that with the RICE acquisition, EQT's consolidation goals will largely be met in the near term. Smaller acquisitions of fill-in acreage are possible, following the theme of drilling longer laterals to improve overall recoveries and unit economics. The company is beginning to see benefits of consolidation, as contiguous acreage patterns allow the company to drill longer laterals, which tends to improve costs per unit and overall well economics, all else equal. At a $2.50 natural gas wellhead price, EQT estimates uplift in ATAX IRR from 52% to 70% when moving from eight well pads with 8,000-foot laterals to 12 well pads with 12,000-foot laterals.
Gathering and transportation costs have increased significantly over the last few periods as EQT contracts for firm transportation to move its gas production to higher priced regions outside of the basin. EQT's contract portfolio and increased local infrastructure have allowed the company to move more gas to the Midwest and South Central regions in 1Q17. In general, the increased gathering and transportation costs are more than offset by the increased realizations, making this an economical way to increase margins despite the headline increase in operating costs per unit. The RICE acquisition increases EQT's transportation capacity to key markets, and triples capacity to the Gulf Coast.
Good Credit Metrics for Category: Pro forma for the RICE acquisition, Fitch expects that EQT stand-alone leverage will increase in 2017 due to the assumption of RICE debt, but fall to 2.3x and 2.0x in 2018 and 2019, respectively. On a consolidated basis, leverage is expected to remain below 3.0x in both 2018 and 2019. Upstream metrics are also expected to remain strong for the category.
EQM Growth Likely to Increase Consolidated Leverage Fitch anticipates that EQM will increase its use of debt over the next few years as the asset portfolio grows and Marcellus shale development continues. The consolidation of EQM into EQT will have the effect of increasing consolidated mid-cycle leverage at EQT. Fitch expects to take differences in volatility of cash flows into account at both EQT and EQM when determining credit quality, rather than a consolidated-only view of leverage.
DERIVATION SUMMARY
Ratings for EQT are supported by the company's significant low-cost position in the Marcellus Shale, strong credit metrics, equity funding of recent acquisitions, and an ample liquidity position. Continued production growth from the Marcellus shale, increasing takeaway and logistics options, and competitive operating expenses should provide EQT with profitable natural gas production opportunities even in a low natural gas price environment.
KEY ASSUMPTIONS
--EQT and RICE complete C-Corp merger using EQT equity valued at approximately $5.4 billion. EQT will acquire RICE for 0.37 shares of EQT stock plus $5.30 in cash per share of RICE;
--Production of approximately 4.2 bcfd in 2018 from the combined asset platform;
--Geographic differentials tighten moderately in out years;
--Current hedge positions are incorporated into cash flow forecasts;
--EQM continues to fund near-term organic growth and asset dropdowns primarily with equity, switching to more debt in out years as the asset base grows.
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
--Increased production volumes with a continuation of credit-neutral funding policies for upstream production growth;
--Mid-cycle stand-alone EQT leverage profile below 1.5x;
--Sustained improvement in gas price realizations relative to benchmarks and improved margins.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
--An inability to successfully de-leverage following close of the RICE acquisition;
--Mid-cycle stand-alone debt/EBITDA projections above 2.5x;
--A substantial reduction in liquidity driven by aggressive capex spending in a lower gas-price environment;
--Material amounts of negative free cash flow or opportunistic leveraging acquisitions funded with increases in EQT gross debt.
LIQUIDITY
Strong Liquidity Position: EQT's liquidity position is strong relative to its peers. Liquidity was $2.4 billion as of March 31, 2017 consisting of $857.5 million in cash ($900 million consolidated less $42.5 million held at EQM) and $1.5 billion available on the EQT credit facility. Financial flexibility should remain adequate despite Fitch's expectation of range-bound natural gas prices. Substantially all of EQT's acreage is held in-fee or by production, and the company has the ability to adjust upstream spending levels to optimize economics in response to spot and forward gas prices. EQM also has a $750 million revolver in place to fund organic growth spending. Fitch notes there is a period of execution risk associated with the RICE acquisition, including the timing and consideration of midstream asset dropdowns, but believes that these risks are manageable in the context of the current rating> |
