Appalachian shale gas producer EQT Corp. expects its corporate credit rating will return to investment grade in the first half of 2022, executives said.
"Investment-grade status unlocks multiple benefits such as improved cost and access to capital as well as the ability to sign long-term domestic and international sales contracts," EQT President and CEO Toby Rice told analysts on a Feb. 10 conference call to discuss fourth-quarter 2021 earnings results.
CFO David Khani said EQT will likely sign its own LNG supply contracts later this year, with prices pegged to higher-priced European or Asian indexes rather than the U.S. benchmark Henry Hub.
"We're having lots of conversations right now with LNG players across the whole chain," Khani said.
Khani said a bump to investment grade would immediately return $400 million in cash used to back letters of credit and would reduce EQT's bond interest rates.
Other views
Credit research firm CreditSights said EQT may be too optimistic about a return to investment grade in the near future. "Well-below-strip hedges put in place to de-risk the Alta Resources LLC acquisition limit upside to the recent natural gas price rally," senior analyst Charles Johnston told clients after the call. EQT closed on the purchase of Alta's Northeast Marcellus Shale assets in July 2021.
"EQT has roughly 63% of 2022 estimated gas production hedged, resulting in our year-end 2022 projections of [net leverage] 1.5x and 56% funds from operations/debt," Johnston said. "In order to return to [investment grade], S&P is looking for sustained FFO/debt greater than 60%."
EQT's efforts to get the bulk of its 5.5 Bcfe per day of production certified as responsibly sourced gas, or RSG, are paying off, executives said. EQT is realizing a 5 cent/Mcf premium for gas certified by a third party as having lower methane emissions. That announcement marks one of the first times a shale gas company has pegged the value of the RSG tag.
Rice said the work on environmental, social and governance issues is adding value to the company. "We have signed 10 deals encompassing roughly 1.2 Tcfe in total for around $60 million in premiums to date," Rice said. "We expect the value of RSG will improve further as the market develops and as the cost of carbon increases. Lastly, we are attracting interest from several LNG parties across the whole value chain to gain exposure to international prices."
Investors seemed to agree. Although EQT's adjusted earnings of 41 cents per share fell short of analyst expectations, they traded shares up about 1% to close at $21.67 on heavier than normal volume. The consensus of analysts surveyed by S&P Global Market Intelligence was for 53 cents per share.
Increase in free cash flow
Free cash flow generation is becoming a dominant metric for shale oil and gas producers, with investors focused on dividends and share buybacks. EQT reported $422 million in free cash flow for the fourth quarter of 2021, nearly four times the $109 million it saw in the same period in 2020. The company said it should report roughly $1.6 billion in free cash in 2022, a 68% increase over 2021, and more than $10 billion in free cash through 2026. For now, EQT will stick to its previously announced $1 billion share buyback and annual dividend of 50 cents per share.
"The company announced a 2022 plan consisting of maintenance capex 5%/3% above our/street forecasts and production ~2% below our/street forecasts," Truist Securities Inc. analyst Neal Dingmann told clients before the call. "As we'd expect to see with nearly all of our companies, service cost inflation appears to be the key driver behind the higher capex guidance."
EQT's adjusted fourth-quarter 2021 income of $156 million reversed $5 million in adjusted losses in the fourth quarter of 2020. On a GAAP basis, EQT reported fourth-quarter earnings of $1.8 billion, or $4.69 per share, on the strength of a $1 billion gain on derivatives not designated as hedges. In the same period in 2020, EQT reported $63.6 million in profits.
EQT produced 527 Bcfe in the quarter, almost all-natural gas, a 31% increase over the final quarter of 2020. The bulk of the new volumes came from Appalachian assets that the company purchased from Chevron Corp. and from its purchase of Alta Resources.
EQT reported realizing $2.68/Mcfe after hedging for its fourth-quarter production, a 17% increase over the year-ago quarter.