Fitch Affirms EQT's IDR and Unsecured Notes at 'BBB-'; Outlook Stable
NEW YORK -- December 19, 2013
Fitch Ratings has affirmed EQT Corporation's (EQT) Issuer Default Rating (IDR)
and senior unsecured debt rating at 'BBB-'. The short-term IDR and commercial
paper rating of 'F3' has been withdrawn, since EQT no longer issues commercial
The Rating Outlook is Stable. Approximately $2.5 billion of debt outstanding
is affected by today's rating action.
KEY RATINGS DRIVERS
The 'BBB-' rating is supported by EQT's healthy credit metrics, which include
reduced leverage ratios, strong financial performance, good asset quality and
operating metrics in the upstream business, including a low-cost legacy
acreage position in the Marcellus Shale, low FD&A costs, and a three-year
hedging program in place for approximately 52% of 2014 sales volumes. The
midstream segment has also had strong financial performance and is expected to
provide stable cash flows. The company's liquidity position remains strong and
Fitch does not expect funding for the 2014 capex budget to be funded with
Significant production growth particularly from the Marcellus has enabled EQT
to produce natural gas at low costs even in today's weak gas-price
environment. Sales volumes in the Marcellus grew 74% in 3Q'13 over the prior
year period, and total volumes have grown by 42%, rising to 1 Bcfe per day in
the latest quarter. Marcellus sales volumes accounted for approximately 75% of
EQT total 3Q'13 volumes. In 2014, EQT expects sales volumes to increase in the
range of 26% to 31%. The midstream business primarily serves EQT production
and has therefore seen significant volume increases as well. Third-party
volumes have been increasing in the midstream segment which should slightly
decrease its reliance on EQT production volumes.
Ratings concerns include the shifting business risk profile as EQT transitions
closer to a pure-play E&P through the combination of strong growth in the E&P
segment and ongoing dropdowns of regulated assets to its master limited
partnership (MLP), EQT Midstream Partners, LP (EQM; not rated). Upstream
operations accounted for 65% of LTM EBITDA at Sept. 30 and Fitch forecasts
this segment may account for close to 70% of EBITDA in 2014 following the
divestiture of a regulated utility which provided steady cash flows, required
little investment, and accounted for 8% of EBITDA in the LTM. Other concerns
include EQT's relatively undiversified focus in the Marcellus shale region,
the high capital requirements needed to fund the drilling program, and ongoing
pattern of negative free cash flow. Additional concerns include the prospects
for a sustained environment of weak natural gas pricing.
Leverage: As EQT has grown its upstream operations, which are viewed as more
volatile from a credit perspective, it has reduced its financial risk by
reducing leverage. At the end of 3Q'13, EQT's leverage was 1.9x, a full turn
lower than 3Q'12 when it was 2.9x. Fitch expects leverage to be approximately
2.0x at the end of 2014. Natural gas prices and capex spending are the primary
variables expected to impact leverage.
Liquidity: The company continues to maintain adequate liquidity for its
funding requirements. As of 3Q'13, liquidity was $1.9 billion which includes
$424 million of cash and full availability on its $1.5 billion revolver which
matures in 2016. EQT just closed on the sale of its distribution business, and
cash proceeds are $740 million, which will add to the company's liquidity
position. EQT's MLP, EQM, has its own $350 million revolver which matures in
2017; it is a self-financing entity. Debt maturities at EQT are manageable
with nothing due until $150 million mature in 2015. EQT's bank agreement has
one material financial covenant which limits debt-to-capital at 65%. Fitch
expects EQT to have debt-to-capital significantly lower than that in the next
EQT has funded a portion of its 2013 liquidity needs with the dropdown of the
Sunrise Pipeline into its MLP. Other midstream assets reside at EQM and Fitch
expects that more assets may be dropped into the MLP and provide EQT with
additional cash proceeds.
Spending: Capital expenditures continue to be significant as EQT continues to
focus on its low-cost drilling program in the Marcellus. Between 2008 and
2012, capital expenditures averaged $1.25 billion per year. In the LTM ending
3Q'13, it was $1.6 billion and the company forecasts spending of $2.4 billion
in 2014 with $1.9 billion (or 79%) of the budget directed to upstream
operations. Of the $1.9 billion, $1.1 billion will be for spending in the
Marcellus. Midstream spending is expected to be approximately $475 million
(this excludes spending at EQM which is a standalone self-financing entity).
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
--Positive rating action is not viewed as likely; however, a significant
reduction in leverage or a shift away from expanding upstream operations could
Negative: Future developments that may, individually or collectively, lead to
a negative rating action include:
--A significant and prolonged drop in natural gas prices without an
appropriate adjustment to spending;
--Increased drilling activity and expenditures in a period of low commodity
prices that lead to weaker credit metrics;
--Leverage which exceeds the 2.25x to 2.5x range for a sustained period while
upstream operations remain the company's focus.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology' Aug. 5, 2013;
--'2014 Outlook: North American Oil & Gas' Dec. 12, 2013;
--'2014 Outlook: Midstream Services' December 2013;
--'Pipelines, Midstream, and MLP Stats Quarterly - Second Quarter 2013' Oct.
--'Investor FAQs: Recent Questions on the Pipeline Midstream and MLP Sectors'
August 5, 2013;
--'Marcellus Shale Report: Midstream and Pipeline Sector Challenges and
Opportunities' June 10, 2012.
Applicable Criteria and Related Research:
2014 Outlook: North American Oil & Gas (Strong Oil Prices Continue to Support
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Marcellus Shale Report: Midstream and Pipeline Sector --
Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors
Pipelines, Midstream, and MLP Stats Quarterly -- Second-Quarter 2013
2014 Outlook: Midstream Services
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Kathleen Connelly, +1-212-908-0290
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Ralph Pellecchia, +1-212-908-0586
Mark C. Sadeghian, CFA, +1-312-368-2090
Brian Bertsch, +1-212-908-0549 (New York)
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