March 20, 2012 / 4:02 PM / 5 years ago

TEXT-Fitch revises EQT outlook to negative

March 20 - Fitch Ratings has affirmed the ratings of EQT Corporation 
(EQT) as follows: 	
--Issuer Default Rating (IDR) at 'BBB';	
--Senior unsecured debt at 'BBB';	
--Short-term IDR at 'F2'.	
The Rating Outlook has been revised to Negative from Stable. Approximately $2.7 	
billion of debt outstanding is affected by today's rating action. 	
The Outlook revision reflects the continued growth of the company's upstream 	
operations which introduces more credit risk to the financial profile versus 	
lower volatility midstream and distribution businesses. During 2011, 	
approximately 63% of segment EBITDA was from exploration and production (E&P). 	
Fitch anticipates that E&P as a percentage of total earnings and cash flow will 	
increase meaningfully at EQT over the near-to-medium term, due to the 	
combination of the company's high allocation to upstream spending, and to the 	
expected drop-down of lower-volatility assets into the Midstream MLP (EQT 	
Midstream Partners, LP).	
Key rating factors which support the rating include the company's healthy credit	
metrics, strong operating performance, good upstream operational metrics 	
including low FD&A costs and solid hedge position (50% of total in 2012), 	
relatively predictable cash flows from its midstream and distribution segment 	
which are primarily regulated, and a significant liquidity position. The 	
company's plan to place a portion of its legacy Equitrans midstream assets into 	
an MLP which is planned for an IPO will enable the company to maintain control 	
over the assets while benefiting from the monetization of a portion of the 	
Concerns include a changing business risk profile stemming from EQT's growing 	
focus on upstream operations, 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, uncertainty surrounding the success of the planned IPO of the MLP, and 	
a heightened environmental focus on Appalachian shale. 	
At the end of the 2011, EQT's leverage (defined as debt adjusted for operating 	
leases to EBITDA) was 2.9 times (x), which is fairly unchanged from the end of 	
2010. While EBITDA increased by $257 million to $998 million in 2011, debt 	
increased by $773 million. Debt grew as a result of the November 2011 $750 	
million bond offering. Fitch expects leverage to decrease and fall in the range 	
of 2.5x-2.75x by the end of 2012. 	
Liquidity remains significant and should support growth over the near-to-medium 	
term. At the end of 2011, liquidity was $2.3 billion which includes $831 million	
of cash (largely from the November 2011 bond offering) and full availability on 	
its $1.5 billion revolver which matures in 2014. Debt maturities are manageable 	
with $200 million due 2012 and nothing after that until $150 million due 2015. 	
Capital expenditures continue to be significant as EQT continues to focus on its	
low-cost drilling program in the Marcellus. Between 2008 and 2011, capital 	
expenditures averaged $1.2 billion per year. Last year, it was $1.3 billion. In 	
2012, EQT plans to spend approximately $1.5 billion, expected to be funded with 	
cash from operations which management forecasts to be approximately $900 	
million, and the debt proceeds from November 2011.  	
Negative rating actions could occur if there were a significant and prolonged 	
drop in natural gas prices without an appropriate adjustment to spending. Other 	
drivers that could lead to negative action include a significant expansion 	
beyond Fitch's expectations of the upstream business. Positive actions are not 	
viewed as likely but could occur if EQT significantly reduced leverage or scaled	
back its E&P operations. 	
EQT benefits from its integrated operations in the Appalachian Basin which 	
generate stable, fee-based and regulated cash flows from its midstream and 	
utility operations, respectively. These assets complement the company's 	
low-cost, high-return drilling operations. Upstream results are enhanced by the 	
company's increasing expertise in drilling horizontal wells in shale 	
developments with an emphasis on reducing costs and improving well performance. 	
The company's competitive cost structure is evident in its low finding and 	
development and lifting costs, which gives EQT a low break-even natural gas 	
price. Natural gas realizations also benefit from the proximity to high-demand 	
Northeast markets. 	
Given the predictable nature of EQT's production, the company's principally 	
unregulated gathering operations also generate more stable cash flow streams. 	
The company's transmission assets are largely regulated by FERC and the 	
distribution assets by state utility commissions, whose operations of generate 	
fairly stable and predictable cash flows as well. A portion of these midstream 	
assets are to be placed into the planned public MLP. An S-1 was filed in 	
February 2012.    	
In the Marcellus shale play, there is a heightened focus on environmental issues	
associated with production, most notably water processing and disposal. EQT has 	
taken steps to mitigate this, including recycling nearly 100% of its fracturing 	
fluids. Fitch believes that environmental concerns will continue for producers 	
in the Marcellus; if issues arise, Fitch believes costs could increase and the 	
pace of drilling could be slowed. 	
Additional information is available at ''. The ratings above	
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been 	
compensated for the provision of the ratings.	
Applicable Criteria and Relevant Research:	
--'Updating Fitch's Oil & Gas Price Deck' (Feb. 6, 2012);	
--'Corporate Rating Methodology' (Aug. 12, 2011);	
--'Natural Gas Pipelines: Hot Topics--Long Term Trends Affecting Pipeline Risk' 	
(Oct 13, 2011);	
--'Integrated and Upstream Oil & Gas Companies - Sector Credit Factor 	
Compendium' (March 25, 2011).	
Applicable Criteria and

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below