Fitch Affirms EQT's IDR and Unsecured Notes at 'BBB-'; Outlook Stable
NEW YORK -- May 12, 2014
Fitch Ratings has affirmed EQT Corporation's (EQT) Issuer Default Rating (IDR)
and senior unsecured debt rating at 'BBB-'.
The Rating Outlook is Stable. Approximately $2.6 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 which includes approximately 58% of the remaining 2014
expected 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 the 2014 capex
budget at EQT to be funded with debt.
Significant production growth particularly from the Marcellus has enabled EQT
to produce natural gas at low costs. Sales volumes in the Marcellus grew 50%
in the first quarter of 2014 (1Q'14) over the prior year period, and total
volumes have grown by 30%, rising to over 1.1 Bcfe per day in the latest
quarter. Marcellus sales volumes accounted for approximately 78% of EQT total
1Q'14 volumes. In 2014, EQT expects sales volumes to increase in the range of
23% to 27%. At year-end 2014, reserves were 8.3 Tcfe, up 2.3 Tcfe from the
The midstream business primarily serves EQT production and has therefore seen
significant volume increases as well. During 2013, EQT accounted for
approximately 70% of midstream revenues. 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), EQM - EQT Midstream Partners, LP (EQM; not rated). Upstream
operations accounted for approximately 71% of latest 12 months (LTM) EBITDA at
March 31 (adjusted for the sold Distribution business) and Fitch forecasts
this segment may account for just over 70% of EBITDA in 2014. 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 exposure to
volatile natural gas prices and negative basis differentials in the Marcellus.
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
lowering leverage. At the end of 1Q'14, EQT's leverage was 1.8x. Between 2008
and 2012, its year end leverage ranged from a high of 3.4x and a low of 2.6x.
Fitch expects leverage to be in the range of 1.75x- 2.0x at the end of 2014.
Natural gas prices and capex spending are the primary variables expected to
Liquidity: The company continues to maintain adequate liquidity for its
funding requirements. As of March 31, 2014, liquidity was $2.4 billion which
includes $909 million of cash ($24 million held at EQM) and full availability
on its $1.5 billion revolver which matures in 2019. EQT's MLP, EQM, has its
own $750 million revolver which matures in 2019; it is a self-financing
entity. Debt maturities at EQT are manageable with nothing significant 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 few years.
EQT funded a portion of its 2014 liquidity needs with the dropdown of the
Jupiter Gathering System into its MLP which closed in early May 2014. EQT
received $1.12 billion in cash and $59 million of common and general
partnership units. The gathering system is located in the Marcellus and has
10-year fixed-fee contracts with EQT. Fitch expects these proceeds to be used
for EQT's capex budget in 2014. Fitch notes that the current transaction is
approximately twice as large as the prior dropdown which was for Sunrise
Pipeline, LLC. That transaction occurred in July 2013 for total consideration
of approximately $650 million.
Other significant midstream assets reside at EQT and Fitch expects that more
assets may be dropped into the MLP and provide EQT with additional cash
proceeds in the coming years.
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 2013, spending
was $1.8 billion and management forecasts $2.4 billion for 2014 with
approximately $1.9 billion (or approximately 80%) of that directed toward
upstream operations (this excludes spending at EQM). Of the $1.9 billion, $1.1
billion will be for spending in the Marcellus.
Prior to the closing of the Jupiter transaction, EQT held 42.6% of EQM's
limited partnership units and the 2% general partnership interest.
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 Related Research:
--'Corporate Rating Methodology: Including Short-term Ratings and Parent and
Subsidiary Linkage' Aug. 5, 2013;
--'Rating Pipelines, Midstream and MLPs: Sector Credit Factors' Jan. 13, 2014;
--'Pipelines, Midstream, and MLP Stats Quarterly - Fourth-Quarter 2013' May 2,
--'2014 Outlook: North American Oil & Gas' Dec. 12, 2013;
--'2014 Outlook: Midstream Services' Dec. 10, 2013;
--'Investor FAQs: Recent Questions on the Pipeline Midstream and MLP Sectors'
Aug. 5, 2013;
--'Marcellus Shale Report: Midstream and Pipeline Sector Challenges and
Opportunities' June 10, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Rating Pipelines, Midstream and MLPs -- Sector Credit Factors
Pipelines, Midstream, and MLP Stats Quarterly -- Fourth-Quarter 2013
2014 Outlook: North American Oil & Gas (Strong Oil Prices Continue to Support
2014 Outlook: Midstream Services
Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors
Marcellus Shale Report: Midstream and Pipeline Sector --
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Kathleen Connelly, +1 212-908-0290
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Ralph Pellecchia, +1 212-908-0586
Mark C. Sadeghian, CFA, +1 312-368-2090
Brian Bertsch, +1 212-908-0549
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