NEW YORK--(BUSINESS WIRE)--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 prior year.
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 impact leverage.
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 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 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;
--'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 Subsidiary Linkage
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 Energy Complex)
2014 Outlook: Midstream Services
Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors
Marcellus Shale Report: Midstream and Pipeline Sector -- Challenges/Opportunities