NEW YORK--(BUSINESS WIRE)--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 The short-term IDR and commercial paper rating of 'F3' has been withdrawn, since EQT no longer issues commercial paper.
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 debt.
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 few years.
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 prompt changes.
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. 3, 2013;
--'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 Energy Complex)
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Marcellus Shale Report: Midstream and Pipeline Sector -- Challenges/Opportunities
Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors
Pipelines, Midstream, and MLP Stats Quarterly -- Second-Quarter 2013
2014 Outlook: Midstream Services