The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and the notes thereto included in this report.
CAUTIONARY STATEMENTS This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Statements that do not relate strictly to historical or current facts are forward-looking and are usually identified by the use of words such as "anticipate," "estimate," "could," "would," "will," "may," "forecast," "approximate," "expect," "project," "intend," "plan," "believe" and other words of similar meaning, or the negative thereof, in connection with any discussion of future operating or financial matters. Without limiting the generality of the foregoing, forward-looking statements contained in this Quarterly Report on Form 10-Q include the matters discussed in section "Outlook" herein and the expectations of plans, strategies, objectives and growth and anticipated financial and operational performance ofEQT Corporation and its subsidiaries (collectively, EQT or the Company), including guidance regarding the Company's strategy to develop its reserves; drilling plans and programs (including the number, type, depth, spacing, lateral lengths and location of wells to be drilled and the availability of capital to complete these plans and programs); projections of wells to be drilled per combo-development project; estimated reserves, including potential future downward adjustments of reserves and reserve life; total resource potential and drilling inventory duration; projected production and sales volumes and growth rates (including liquids production and sales volumes and growth rates); changes in basis; potential impacts to the Company's business and operations resulting from the COVID-19 pandemic; the effects of the COVID-19 pandemic and actions taken by theOrganization of the Petroleum Exporting Countries (OPEC) and other allied countries (collectively known as OPEC+) as it pertains to the global supply and demand of, and prices for, natural gas, NGLs and oil; the impact of commodity prices on the Company's business; potential future impairments of the Company's assets; the Company's ability to reduce its drilling and completions costs, other costs and expenses, and capital expenditures, and the timing of achieving any such reductions; infrastructure programs; the cost, capacity, and timing of obtaining regulatory approvals; the Company's ability to successfully implement and execute the executive management team's operational, organizational and technological initiatives, and achieve the anticipated results of such initiatives; the projected reduction of the Company's gathering and compression rates resulting from the Company's consolidated gas gathering and compression agreement withEQM Midstream Partners, LP , and the anticipated cost savings and other strategic benefits associated with the execution of such agreement; monetization transactions, including asset sales, joint ventures or other transactions involving the Company's assets, the timing of such monetization transactions, if at all, the projected proceeds from such monetization transactions and the Company's planned use of such proceeds; potential acquisition transactions; the projected capital efficiency savings and other operating efficiencies and synergies resulting from the Company's monetization transactions and acquisition transactions; the timing and structure of any dispositions of the Company's remaining retained shares of Equitrans Midstream Corporation's (Equitrans Midstream) common stock, and the planned use of the proceeds from any such dispositions; the amount and timing of any repayments, redemptions or repurchases of EQT common stock, outstanding debt securities or other debt instruments; the Company's ability to reduce its debt and the timing of such reductions, if any; projected dividends, if any; projected cash flows and free cash flow; projected capital expenditures; liquidity and financing requirements, including funding sources and availability; the Company's ability to maintain or improve its credit ratings, leverage levels and financial profile; the Company's hedging strategy; the effects of litigation, government regulation and tax position; and the expected impact of changes to tax laws. The forward-looking statements included in this Quarterly Report on Form 10-Q involve risks and uncertainties that could cause actual results to differ materially from projected results. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. The Company has based these forward-looking statements on current expectations and assumptions about future events, taking into account all information currently known by the Company. While the Company considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks and uncertainties, many of which are difficult to predict and beyond the Company's control. The risks and uncertainties that may affect the operations, performance and results of the Company's business and forward-looking statements include, but are not limited to, those set forth in Item 1A., "Risk Factors" and elsewhere in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 , as updated by Part II, Item 1A., "Risk Factors" in this Quarterly Report on Form 10-Q and other documents the Company files from time to time with theSecurities and Exchange Commission . Any forward-looking statement speaks only as of the date on which such statement is made, and the Company does not intend to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. 20
--------------------------------------------------------------------------------
Table of Contents
EQT Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Consolidated Results of Operations
Net loss for the three months endedJune 30, 2020 was$263.1 million ,$1.03 per diluted share, compared to net income for the same period in 2019 of$125.6 million ,$0.49 per diluted share. The decrease was attributable primarily to decreased operating revenues, the loss on sale/exchange of long-lived assets, decreased dividend and other income and increased interest expense, partly offset by a gain on investment in Equitrans Midstream, increased income tax benefit, decreased depreciation and depletion expense and decreased selling, general and administrative expense. Net loss for the six months endedJune 30, 2020 was$430.2 million ,$1.68 per diluted share, compared to net income for the same period in 2019 of$316.3 million ,$1.24 per diluted share. The decrease was attributable primarily to decreased operating revenues, a loss on investment in Equitrans Midstream and the loss on sale/exchange of long-lived assets, partly offset by the gain on the Equitrans Share Exchange (defined and discussed in Note 9 to the Condensed Consolidated Financial Statements), increased income tax benefit, decreased depreciation and depletion expense and decreased selling, general and administrative expense. See "Sales Volumes and Revenues," "Production-Related Operating Expenses" and "Other Operating Expenses" for discussions of items affecting operating income and "Other Income Statement Items" for a discussion of other income statement items. See "Investing Activities" under "Capital Resources and Liquidity" for a discussion of capital expenditures.
Average Realized Price Reconciliation
The following table presents detailed natural gas and liquids operational information to assist in the understanding of the Company's consolidated operations, including the calculation of the Company's average realized price ($/Mcfe), which is based on adjusted operating revenues, a non-GAAP supplemental financial measure. Adjusted operating revenues is presented because it is an important measure used by the Company's management to evaluate period-to-period comparisons of earnings trends. Adjusted operating revenues should not be considered as an alternative to total operating revenues. See "Non-GAAP Financial Measures Reconciliation" for a reconciliation of adjusted operating revenues with total operating revenues, the most directly comparable financial measure calculated in accordance with GAAP. 21
--------------------------------------------------------------------------------
Table of Contents
EQT Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (Thousands, unless otherwise noted) NATURAL GAS Sales volume (MMcf) 325,248 351,211 694,990 714,928 NYMEX price ($/MMBtu) (a)$ 1.71 $ 2.64 $ 1.84 $ 2.90 Btu uplift 0.09 0.12 0.09 0.14 Natural gas price ($/Mcf)$ 1.80 $ 2.76 $ 1.93 $ 3.04 Basis ($/Mcf) (b)$ (0.36) $
(0.36)
(0.02) (0.05) 0.02 (0.08) Average differential, including cash settled basis swaps ($/Mcf)$ (0.38) $
(0.41)
Average adjusted price ($/Mcf)$ 1.42 $ 2.35 $ 1.66 $ 2.76 Cash settled derivatives (not designated as hedges) ($/Mcf) 1.00 0.20 0.79 0.07 Average natural gas price, including cash settled derivatives ($/Mcf)$ 2.42 $ 2.55 $ 2.45 $ 2.83 Natural gas sales, including cash settled derivatives$ 786,595 $
896,441
LIQUIDS
Natural gas liquids (NGLs), excluding ethane: Sales volume (MMcfe) (c) 10,572 11,201 21,392 23,750 Sales volume (Mbbl) 1,762 1,867 3,565 3,958 Price ($/Bbl)$ 13.52 $
21.15
(0.52) 2.86 (0.26) 2.22 Average NGLs price, including cash settled derivatives ($/Bbl)$ 13.00 $ 24.01 $ 15.82 $ 27.97 NGLs sales$ 22,910 $ 44,821 $ 56,421 $ 110,724 Ethane: Sales volume (MMcfe) (c) 8,769 6,455 12,098 12,393 Sales volume (Mbbl) 1,461 1,076 2,016 2,066 Price ($/Bbl)$ 3.38 $ 6.54 $ 3.56 $ 6.87 Ethane sales$ 4,941 $ 7,038 $ 7,186 $ 14,190 Oil: Sales volume (MMcfe) (c) 1,058 1,247 2,237 2,513 Sales volume (Mbbl) 176 208 373 419 Price ($/Bbl)$ 10.17 $ 48.78 $ 21.48 $ 43.69 Oil sales$ 1,795 $ 10,140 $ 8,010 $ 18,300 Total liquids sales volume (MMcfe) (c) 20,399 18,903 35,727 38,656 Total liquids sales volume (Mbbl) 3,399 3,151 5,954 6,443 Total liquids sales$ 29,646 $ 61,999 $ 71,617 $ 143,214 TOTAL Total natural gas and liquids sales, including cash settled derivatives (d)$ 816,241 $
958,440
345,647 370,114 730,717 753,584 Average realized price ($/Mcfe)$ 2.36 $ 2.59 $ 2.43 $ 2.88 (a)The Company's volume weightedNew York Mercantile Exchange (NYMEX) natural gas price (actual average NYMEX natural gas price ($/MMBtu)) was$1.72 and$2.64 for the three months endedJune 30, 2020 and 2019, respectively, and$1.83 and$2.89 for the six months endedJune 30, 2020 and 2019, respectively. (b)Basis represents the difference between the ultimate sales price for natural gas and the NYMEX natural gas price. (c)NGLs, ethane and oil were converted to Mcfe at a rate of six Mcfe per barrel. (d)Total natural gas and liquids sales, including cash settled derivatives, is also referred to in this report as adjusted operating revenues, a non-GAAP supplemental financial measure. 22
--------------------------------------------------------------------------------
Table of Contents
EQT Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Non-GAAP Financial Measures Reconciliation
The table below reconciles adjusted operating revenues, a non-GAAP supplemental financial measure, with total operating revenues, its most directly comparable financial measure calculated in accordance with GAAP. Adjusted operating revenues (also referred to in this report as total natural gas and liquids sales, including cash settled derivatives) is presented because it is an important measure used by the Company's management to evaluate period-to-period comparisons of earnings trends. Adjusted operating revenues excludes the revenue impacts of changes in the fair value of derivative instruments prior to settlement and net marketing services and other. Management uses adjusted operating revenues to evaluate earnings trends because, as a result of the measure's exclusion of the often-volatile changes in the fair value of derivative instruments prior to settlement, the measure reflects only the impact of settled derivative contracts. Net marketing services and other primarily includes the costs of, and recoveries on, pipeline capacity releases. Because management considers net marketing services and other to be unrelated to the Company's natural gas and liquids production activities, adjusted operating revenues excludes net marketing services and other. Management believes that adjusted operating revenues provides useful information to investors for evaluating period-to-period comparisons of earnings trends. Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (Thousands, unless otherwise noted) Total operating revenues$ 527,074 $ 1,310,252 $ 1,634,131 $ 2,453,425 Deduct (add): Gain on derivatives not designated as hedges (26,426) (407,635) (415,862) (275,639) Net cash settlements received (paid) on derivatives not designated as hedges 315,393 53,144 561,129 (10,490) Premiums received (paid) for derivatives that settled during the period 2,076 4,769 (1,479) 7,206 Net marketing services and other (1,876) (2,090) (4,296) (5,646) Adjusted operating revenues, a non-GAAP financial measure$ 816,241 $ 958,440
Total sales volumes (MMcfe) 345,647 370,114 730,717 753,584
Average realized price ($/Mcfe)
$ 2.43 $ 2.88 23
--------------------------------------------------------------------------------
Table of Contents
EQT Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Sales Volumes and Revenues
Three Months Ended June 30, Six Months Ended June 30, 2020 2019 % 2020 2019 % (Thousands, unless otherwise noted) Sales volumes by shale (MMcfe): Marcellus (a) 305,752 318,588 (4.0) 639,503 645,673 (1.0) Ohio Utica 38,430 50,295 (23.6) 88,205 104,920 (15.9) Other 1,465 1,231 19.0 3,009 2,991 0.6 Total sales volumes (b) 345,647 370,114 (6.6) 730,717 753,584 (3.0) Average daily sales volumes (MMcfe/d) 3,798 4,067 (6.6) 4,015 4,163 (3.6) Operating revenues: Sales of natural gas, NGLs and oil$ 498,772 $ 900,527 (44.6)$ 1,213,973 $ 2,172,140 (44.1) Gain on derivatives not designated as hedges 26,426 407,635 (93.5) 415,862 275,639 50.9 Net marketing services and other 1,876 2,090 (10.2) 4,296 5,646 (23.9) Total operating revenues$ 527,074 $ 1,310,252 (59.8)$ 1,634,131 $ 2,453,425 (33.4)
(a)Includes Upper Devonian wells. (b)NGLs, ethane and oil were converted to Mcfe at a rate of six Mcfe per barrel.
Three Months Ended
Sales of natural gas, NGLs and oil. Sales of natural gas, NGLs and oil decreased for the three months endedJune 30, 2020 compared to the same period in 2019 due to a lower average realized price and lower sales volumes. Average realized price decreased due to lower NYMEX prices and lower liquids prices, partly offset by higher cash settled derivatives. For the three months endedJune 30, 2020 and 2019, the Company received$315.4 million and$53.1 million , respectively, of net cash settlements on derivatives not designated as hedges, which are included in average realized price but may not be included in operating revenues. Sales volumes decreased due primarily to the Company's strategic decision to temporarily curtail approximately 1.4 Bcfe per day of gross production, equivalent to approximately 1.0 Bcfe per day of net production, beginning onMay 16, 2020 (the Strategic Production Curtailments). Gain on derivatives not designated as hedges. For the three months endedJune 30, 2020 and 2019, the Company recognized a gain of$26.4 million and$407.6 million , respectively, on derivatives not designated as hedges. The gains for 2020 and 2019 were related primarily to increases in the fair market value of the Company's NYMEX swaps and options due to decreases in NYMEX forward prices.
Six Months Ended
Sales of natural gas, NGLs and oil. Sales of natural gas, NGLs and oil decreased for the six months endedJune 30, 2020 compared to the same period in 2019 due to a lower average realized price and lower sales volumes. Average realized price decreased due to lower NYMEX prices and lower liquids prices, partly offset by higher cash settled derivatives. For the six months endedJune 30, 2020 and 2019, the Company received$561.1 million and paid$10.5 million , respectively, of net cash settlements on derivatives not designated as hedges, which are included in average realized price but may not be included in operating revenues. Sales volumes decreased due primarily to the Strategic Production Curtailments. Gain on derivatives not designated as hedges. For the six months endedJune 30, 2020 and 2019, the Company recognized a gain of$415.9 million and$275.6 million , respectively, on derivatives not designated as hedges. The gain for 2020 was related primarily to increases in the fair market value of the Company's NYMEX swaps and options due to decreases in NYMEX forward prices. The gain for 2019 was related primarily to increases in the fair market value of the Company's NYMEX swaps and options due to decreases in NYMEX forward prices, partly offset by decreases in the fair market value of the Company's basis swaps due to increases in basis prices. 24
--------------------------------------------------------------------------------
Table of Contents
EQT Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Production-Related Operating Expenses
The following table presents information on the Company's production-related operating expenses. Three Months Ended June 30, Six Months Ended June 30, 2020 2019 % 2020 2019 % (Thousands, unless otherwise noted) Operating expenses: Gathering$ 252,095 $ 255,085 (1.2)$ 513,816 $ 519,569 (1.1) Transmission 119,515 149,164 (19.9) 266,677 291,587 (8.5) Processing 34,026 32,735 3.9 64,977 65,074 (0.1) Lease operating expenses (LOE), excluding production taxes 25,894 17,155 50.9 53,917 40,227 34.0 Production taxes 12,435 19,161 (35.1) 24,792 39,497 (37.2) Exploration 876 1,857 (52.8) 1,799 2,864 (37.2) Selling, general and administrative 43,341 86,208 (49.7) 78,279 135,186 (42.1) Production depletion$ 317,905 $ 368,734 (13.8)$ 670,982 $ 756,148 (11.3) Other depreciation and depletion 5,191 3,679 41.1 9,640 7,378 30.7 Total depreciation and depletion$ 323,096 $ 372,413 (13.2)$ 680,622 $ 763,526 (10.9) Per Unit ($/Mcfe): Gathering$ 0.73 $ 0.69 5.8$ 0.70 $ 0.69 1.4 Transmission 0.35 0.40 (12.5) 0.36 0.39 (7.7) Processing 0.10 0.09 11.1 0.09 0.09 - LOE, excluding production taxes 0.07 0.05 40.0 0.07 0.05 40.0 Production taxes 0.04 0.05 (20.0) 0.03 0.05 (40.0) Exploration - 0.01 (100.0) - - - Selling, general and administrative 0.13 0.23 (43.5) 0.11 0.18 (38.9) Production depletion 0.92 1.00 (8.0) 0.92 1.00 (8.0)
Three Months Ended
Transportation and processing. Gathering expense decreased on an absolute basis for the three months endedJune 30, 2020 compared to the same period in 2019 due to decreased volumes as a result of the Strategic Production Curtailments, partly offset by a higher gathering rate structure as a result of the Consolidated GGA (defined and discussed in Note 9 to the Condensed Consolidated Financial Statements). The Company expects to realize fee relief and a lower gathering rate structure as a result of the Consolidated GGA beginning in 2021. Gathering expense increased on a per Mcfe basis for the three months endedJune 30, 2020 compared to the same period in 2019 due primarily to higher gathering rates for the reasons described above as well as the impact of the Strategic Production Curtailments on the mix of volumes gathered and contracted rate structure. Transmission expense decreased on an absolute and per Mcfe basis for the three months endedJune 30, 2020 compared to the same period in 2019 due primarily to released capacity on, and credits received from, the Texas Eastern Transmission Pipeline, partly offset by higher costs associated with additional capacity on theTennessee Gas Pipeline . The decrease in transmission expense per Mcfe was partly offset by the 7% decrease in sales volumes. Processing expense increased on an absolute and per Mcfe basis for the three months endedJune 30, 2020 compared to the same period in 2019 due primarily to higher NGL transportation fees. Production. LOE increased on an absolute and per Mcfe basis for the three months endedJune 30, 2020 compared to the same period in 2019 due primarily to higher salt water disposal costs as well as higher repairs and maintenance costs as a result of the Company's increased focus on optimizing production from currently producing wells. Production taxes decreased on an absolute and per Mcfe basis for the three months endedJune 30, 2020 compared to the same period in 2019 due primarily to lower 25
--------------------------------------------------------------------------------
Table of Contents
EQT Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
severance taxes and
Selling, general and administrative. Selling, general and administrative expense decreased on an absolute and per Mcfe basis for the three months endedJune 30, 2020 compared to the same period in 2019 as a result of litigation expenses of$37.8 million recognized in 2019 as well as lower personnel costs due to reductions in workforce. The decrease per Mcfe was partly offset by the 7% decrease in sales volumes. Depreciation and depletion. Production depletion decreased on an absolute and per Mcfe basis for the three months endedJune 30, 2020 compared to the same period in 2019 due primarily to a lower depletion rate and lower volumes.
Six Months Ended
Transportation and processing. Gathering expense decreased on an absolute basis for the six months endedJune 30, 2020 compared to the same period in 2019 due to decreased volumes as a result of the Strategic Production Curtailments, partly offset by a higher gathering rate structure as a result of the Consolidated GGA. The Company expects to realize fee relief and a lower gathering rate structure as a result of the Consolidated GGA beginning in 2021. Gathering expense increased on a per Mcfe basis for the six months endedJune 30, 2020 compared to the same period in 2019 due primarily to higher gathering rates for the reasons described above as well as the impact of the Strategic Production Curtailments on the mix of volumes gathered and contracted rate structure. Transmission expense decreased on an absolute and per Mcfe basis for the six months endedJune 30, 2020 compared to the same period in 2019 due primarily to released capacity on, and credits received from, the Texas Eastern Transmission Pipeline, partly offset by higher costs associated with additional capacity on theTennessee Gas Pipeline . Production. LOE increased on an absolute and per Mcfe basis for the six months endedJune 30, 2020 compared to the same period in 2019 due primarily to higher salt water disposal costs as well as higher repairs and maintenance costs as a result of the Company's increased focus on optimizing production from currently producing wells. Production taxes decreased on an absolute and per Mcfe basis for the six months endedJune 30, 2020 compared to the same period in 2019 due primarily to lower severance taxes andPennsylvania impact fees as a result of lower commodity prices. Selling, general and administrative. Selling, general and administrative expense decreased on an absolute and per Mcfe basis for the six months endedJune 30, 2020 compared to the same period in 2019 as a result of litigation expenses of$45.8 million recognized in 2019 as well as lower personnel costs due to reductions in workforce.
Depreciation and depletion. Production depletion decreased on an absolute and
per Mcfe basis for the six months ended
Other Operating Expenses
Amortization of intangible assets. Amortization of intangible assets for the three months endedJune 30, 2020 was$7.5 million compared to$10.3 million for the same period in 2019. Amortization of intangible assets for the six months endedJune 30, 2020 was$15.0 million compared to$20.7 million for the same period in 2019. The decreases were due primarily to the impairment of intangible assets recognized in the third quarter of 2019, which decreased the amortization rate. Loss on sale/exchange of long-lived assets. During the six months endedJune 30, 2020 , the Company recognized a loss on sale/exchange of long-lived assets of$98.1 million , of which$48.9 million related to the first quarter 2020 Asset Exchange Transactions,$42.5 million related to the second quarter 2020 Divestiture and$6.7 million related to the second quarter 2020 Asset Exchange Transactions. The 2020 Asset Exchange Transactions and 2020 Divestiture are defined and discussed in Note 10 to the Condensed Consolidated Financial Statements. Impairment and expiration of leases. Impairment and expiration of leases for the three months endedJune 30, 2020 was$41.3 million compared to$48.6 million for the same period in 2019. The decrease was driven by decreased lease expirations. Impairment and expiration of leases for the six months endedJune 30, 2020 was$95.0 million compared to$78.1 million for the same period in 2019. The increase was driven by increased lease expirations in the first quarter of 2020 due to the Company's change in strategic focus to core development opportunities as well as changes in market condition. 26
--------------------------------------------------------------------------------
Table of Contents
EQT Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations Transaction, proxy and reorganization. Transaction, proxy and reorganization expense for the three and six months endedJune 30, 2020 were related to transaction and reorganization costs. Transaction, proxy and reorganization expense for the three and six months endedJune 30, 2019 were related to proxy costs.
Other Income Statement Items
Gain on Equitrans Share Exchange. During the first quarter of 2020, the Company recognized a gain on the Equitrans Share Exchange of$187.2 million . See Note 9 to the Condensed Consolidated Financial Statements. (Gain) loss on investment in Equitrans Midstream Corporation. The Company's investment in Equitrans Midstream is recorded at fair value by multiplying the closing stock price of Equitrans Midstream's common stock by the number of shares of Equitrans Midstream's common stock owned by the Company. Changes in fair value are recorded in (gain) loss on investment in Equitrans Midstream Corporation in the Statements of Condensed Consolidated Operations. The Company's investment in Equitrans Midstream fluctuates with changes in Equitrans Midstream's stock price, which was$8.31 and$13.36 as ofJune 30, 2020 andDecember 31, 2019 , respectively. Note, the effect of the Company's sale of 50% of its ownership of its retained shares of Equitrans Midstream's common stock was recorded as a reduction to the investment in Equitrans Midstream in conjunction with the Company's recognition of the gain on the Equitrans Share Exchange. See Note 9 to the Condensed Consolidated Financial Statements. Dividend and other income. Dividend and other income decreased for the three and six months endedJune 30, 2020 compared to the same periods in 2019 due primarily to lower dividends received from the Company's investment in Equitrans Midstream. Loss on debt extinguishment. During the three and six months endedJune 30, 2020 , the Company recognized a loss on debt extinguishment of$0.4 million and$17.0 million , respectively, related to the repayment of the Company's 4.875% senior notes, 2.50% senior notes, floating rate notes and term loan facility. See Note 6 to the Condensed Consolidated Financial Statements. Interest expense. Interest expense increased for the three and six months endedJune 30, 2020 compared to the same periods in 2019 due to increased interest incurred on new debt, including the senior notes issued inJanuary 2020 , borrowings on the Company's term loan facility and the convertible senior notes issued inApril 2020 as well as interest incurred on letters of credit issued in 2020. These increases were partly offset by lower interest incurred due to the repayment of the Company's 8.125% senior notes, 4.875% senior notes, floating rate notes and 2.50% senior notes and decreased borrowings on the Company's credit facility. See Note 6 to the Condensed Consolidated Financial Statements.
Income tax (benefit) expense. See Note 5 to the Condensed Consolidated Financial Statements.
Outlook In 2020, the Company expects to spend$1.075 billion to$1.175 billion in total capital expenditures, which are expected to be funded by operating cash flow and, if required, borrowings on the Company's credit facility. Sales volumes in 2020 are expected to be 1,450 Bcfe to 1,500 Bcfe. The Company's revenues, profitability, ability to grow, liquidity and financial performance are substantially dependent on the prices it receives for, and the Company's ability to develop its reserves of, natural gas, NGLs and oil. Changes in natural gas, NGLs and oil prices could affect, among other things, the Company's development plans, which would increase or decrease the pace of the development and the level of the Company's reserves, as well as the Company's revenues, earnings or liquidity. Lower prices and changes in development plans could also result in non-cash impairments of the book value of the Company's oil and gas properties or other long-lived assets or downward adjustments to the Company's estimated proved reserves. Any such impairments or downward adjustments to the Company's estimated reserves could potentially be material to the Company's financial statements. Increases in natural gas, NGLs or oil prices may be accompanied by, or result in, increased well drilling costs, production taxes, lease operating expenses, volatility in seasonal gas price spreads for the Company's storage assets and end-user conservation or conversion to alternative fuels. In addition, to the extent the Company has hedged its production at prices below the current market price, the Company will not benefit fully from any increase in the price of natural gas.
See "Critical Accounting Policies and Estimates" herein and Note 1 to the Consolidated Financial Statements in the Company's Annual Report on
Form 10 -K for the year ended
27
--------------------------------------------------------------------------------
Table of Contents
EQT Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations See Item 1A., "Risk Factors - Natural gas, NGLs and oil price declines and changes in our development strategy have resulted in impairment of certain of our assets. Future declines in commodity prices, increases in operating costs or adverse changes in well performance or additional changes in our development strategy may result in additional write-downs of the carrying amounts of our assets, including long lived intangible assets, which could materially and adversely affect our results of operations in future periods" in the Company's Annual Report on Form 10- K for the year ended December 31, 2019. COVID-19 and Oil Price War The energy industry has recently experienced two significant external stimuli that have impacted, and are anticipated to continue impacting, both day-to-day operations and the macro environment. The novel coronavirus, or COVID-19, outbreak and voluntary and mandatory quarantines, travel restrictions and other restrictions throughoutthe United States and other parts of the world have resulted in decreased demand for natural gas, NGLs and oil. Additionally, inMarch 2020 , the group of oil producing nations known as OPEC+ failed to reach an agreement over proposed oil production cuts stemming from the decrease in global demand for oil in light of the COVID-19 pandemic (the oil price war). Although the members of OPEC+ eventually reached an agreement to reduce their oil production beginning inMay 2020 and continuing throughApril 2022 , there remains significant uncertainty regarding the future actions of OPEC+, its members and other state-controlled oil companies related to oil price and production controls, including anticipated increases in supply fromRussia and other members of OPEC+, particularlySaudi Arabia . Impact of COVID-19 on the Company's Operations. To date, the Company has experienced limited operational impacts as a direct result of work from home restrictions or COVID-19. As a "life-sustaining" business under the guidelines issued by each of the states in which the Company operates, the Company has been allowed to continue operations, provided that non-essential personnel have been required to work from home. One of the primary actions taken by the Company's new management team over the past twelve months has been the establishment of a digital work environment, which has allowed the Company to maintain the engagement and connectivity of its personnel as well as minimize the number of employees required in the office and field. Impact of Oil Price War on the Company's Operations. The Company has had, and expects to have, limited direct operational impacts from the oil price war. The oversupply of oil and NGLs resulting from the demand destruction attributable to the COVID-19 pandemic is anticipated by some market participants to result in a lack of storage capacity and ultimately the shutting in of certain oil and NGLs production. The Company has limited oil and NGLs exposure, with approximately 95% of its production being natural gas. Impact of COVID-19 and Oil Price War on the Company's Outlook. The prices for natural gas, NGLs and oil have historically been volatile; however, the volatility in the prices for these commodities has substantially increased as a result of recent world developments in 2020. Oil prices in particular drastically fell inMarch 2020 , and, although prices have since risen from historic lows inApril 2020 , oil prices continue to be depressed. However, forward strip pricing for natural gas has increased meaningfully compared to strip prices prior to the COVID-19 pandemic and oil price war, with the principal contributing factor believed to be the market expectation that supply decreases in associated natural gas (defined as natural gas produced as a byproduct of principally oil production activities) as a result of reduced or curtailed operations in oil basins will more than offset reduced demand for natural gas as a result of the COVID-19 pandemic. The impact of these recent developments on natural gas prices and the Company's business are unpredictable, and there is no assurance that natural gas prices will remain at recently elevated prices or that any positive impact from the oil price war will outweigh the negative impact from reduced demand for natural gas as a result of the COVID-19 pandemic or other factors. See Item 1A., "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, as well as Part II, Item 1A., "Risk Factors - The outbreak of the novel coronavirus, or COVID-19, has affected and may materially adversely affect, and any future outbreak of any other highly infectious or contagious diseases may materially adversely affect, our operations, financial performance and condition, operating results and cash flows" in this Quarterly Report on Form 10-Q. Deleveraging Plan InOctober 2019 , the Company announced a plan to reduce its debt through asset monetizations and increased free cash flow (the Deleveraging Plan). The Deleveraging Plan contemplates generating targeted proceeds from monetizations of select, non-core exploration and production assets, core mineral assets and/or the Company's retained equity interest in Equitrans Midstream. Given current market conditions, the Company intends to more selectively pursue non-core asset sales and opportunistically monetize its remaining equity interest in Equitrans Midstream in a strategic manner. The Company believes that the combination of the anticipated proceeds from monetization transactions, anticipated remaining income tax refunds of$201.9 million (in part 28
--------------------------------------------------------------------------------
Table of Contents
EQT Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations accelerated by the Coronavirus Aid, Relief and Economic Security Act (the CARES Act)) and improved realized free cash flow amounts as a result of accelerated well cost reductions will be sufficient to allow the Company to repay or refinance its remaining debt maturing in 2021 by the end of 2020 and begin repaying or refinancing its debt maturing after 2021. Until the Company's leverage target is achieved, the Company expects to use all free cash flow and divestiture proceeds to reduce its debt. As discussed in Note 6 to the Condensed Consolidated Financial Statements, the Company issued the Convertible Notes during the second quarter of 2020. Upon conversion of the Convertible Notes, the Company intends to use a combined settlement approach to satisfy its obligation by paying or delivering to holders of the Convertible Notes cash equal to the principal amount of the obligation and EQT common stock for amounts that exceed the principal amount of the obligation. By settling its Convertible Notes obligation either partially or wholly in EQT common stock, the Company could favorably affect its leverage levels. The successful execution of the Deleveraging Plan is based on the Company's current expectations, including with respect to matters beyond its control, and is subject to change. There can be no assurance that the Company will be able to find attractive asset monetization opportunities or that such transactions will be completed on its anticipated timeframe, if at all. Furthermore, the Company's estimated value for the assets to be monetized under the Deleveraging Plan involves multiple assumptions and judgments about future events that are inherently uncertain; accordingly, there can be no assurance that the resulting net cash proceeds from asset monetization transactions will be as anticipated, even if such transactions are consummated. Some of the factors that could affect the Company's ability to successfully execute the Deleveraging Plan include changes in the financial condition or prospects of prospective purchasers and the availability of financing to potential purchasers on reasonable terms, if at all, the number of prospective purchasers, the number of competing assets on the market, unfavorable economic conditions, industry trends and changes in laws and regulations. If the Company is not able to successfully execute the Deleveraging Plan or otherwise reduce debt to a level the Company believes is appropriate, the Company's credit ratings may be lowered, the Company may reduce or delay its planned capital expenditures or investments and the Company may revise or delay its strategic plans.
Capital Resources and Liquidity
Although the Company cannot provide any assurance, it believes cash flows from operating activities and availability under its credit facility should be sufficient to meet the Company's cash requirements inclusive of, but not limited to, normal operating needs, debt service obligations, planned capital expenditures and commitments for at least the next twelve months.
Operating Activities
Net cash provided by operating activities was$947 million for the six months endedJune 30, 2020 compared to$1,315 million for the same period in 2019. The decrease was due primarily to lower cash operating revenues and unfavorable timing of working capital payments, partly offset by increased cash settlements received on derivatives not designated as hedges and income tax refunds received of$189.6 million during the six months endedJune 30, 2020 . The Company's cash flows from operating activities are affected by movements in the market price for commodities. The Company is unable to predict such movements outside of the current market view as reflected in forward strip pricing. Refer to Item 1A., "Risk Factors - Natural gas, NGLs and oil price volatility, or a prolonged period of low natural gas, NGLs and oil prices, may have an adverse effect on our revenue, profitability, future rate of growth, liquidity and financial position" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 .
Investing Activities
Net cash used in investing activities was$349 million for the six months endedJune 30, 2020 compared to$765 million for the same period in 2019. The decrease was due to lower capital expenditures as a result of the Company's change in strategic focus from production growth to capital efficiency as well as cash received from asset sales and the Equitrans Share Exchange. 29
--------------------------------------------------------------------------------
Table of Contents
EQT Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following table summarizes the Company's capital expenditures.
Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (Millions) Reserve development$ 235 $ 374 $ 458 $ 775 Land and lease 28 56 50 101 Capitalized overhead 13 24 24 41 Capitalized interest 4 6 8 13 Other production infrastructure 19 5 20 11 Other corporate items 4 1 5 1 Total capital expenditures 303 466 565 942 Deduct: Non-cash items (a) (47) (71) (53) (176) Total cash capital expenditures$ 256 $ 395 $ 512
$ 766
(a)Represents the net impact of non-cash capital expenditures, including the effect of timing of receivables from working interest partners, accrued capital expenditures and capitalized share-based compensation costs. The impact of accrued capital expenditures includes the reversal of the prior period accrual as well as the current period estimate.
Financing Activities
Net cash used in financing activities was$600 million for the six months endedJune 30, 2020 compared to$524 million for the same period in 2019. For the six months endedJune 30, 2020 , the primary uses of financing cash flows were net repayments of debt and credit facility borrowings, and the primary source of financing cash flows was net proceeds from the issuance of debt. For the six months endedJune 30, 2019 , the primary uses of financing cash flows were net repayments of credit facility borrowings and debt, and the primary source of financing cash flows was net proceeds from borrowings under the Company's term loan facility.
See Note 6 to the Condensed Consolidated Financial Statements for further discussion of the Company's debt.
OnMarch 26, 2020 , the Company announced its suspension of the quarterly cash dividend on its common stock for purposes of accelerating cash flow to be used for the Deleveraging Plan. Depending on the Company's actual and anticipated sources and uses of liquidity, prevailing market conditions and other factors, the Company may from time to time seek to retire or repurchase its outstanding debt or equity securities through cash purchases in the open market or privately negotiated transactions. The amounts involved in any such transactions may be material. Additionally, the Company plans to dispose of its remaining retained shares of Equitrans Midstream's common stock and use the proceeds to reduce the Company's debt.
Income Tax Receivables
As ofJune 30, 2020 , the Company had a tax receivable of$201.9 million in the Condensed Consolidated Balance Sheet. The tax receivable includes$189.7 million of expected federal refunds of Alternative Minimum Tax credits,$94.8 million of which was accelerated as a result of the CARES Act, and$12.2 million of expected refunds of 2018 state tax return overpayments. See Note 5 to the Condensed Consolidated Financial Statements for further discussion of the CARES Act. 30
--------------------------------------------------------------------------------
Table of Contents
EQT Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Security Ratings and Financing Triggers
The table below reflects the credit ratings and rating outlooks assigned to the Company's debt instruments as ofJuly 22, 2020 . The Company's credit ratings and rating outlooks are subject to revision or withdrawal at any time by the assigning rating agency, and each rating should be evaluated independent from any other rating. The Company cannot ensure that a rating will remain in effect for any given period of time or that a rating will not be lowered or withdrawn by a rating agency if, in the rating agency's judgment, circumstances so warrant. See Note 3 to the Condensed Consolidated Financial Statements for further discussion of what is deemed investment grade. Rating agency Senior notes Outlook Moody's Investors Service (Moody's) Ba3 Negative Standard & Poor's Ratings Service (S&P) BB- Negative Fitch Ratings Service (Fitch) BB Positive Changes in credit ratings may affect the Company's access to the capital markets, the cost of short-term debt through interest rates and fees under the Company's lines of credit, the interest rate on the Adjustable Rate Notes (defined in Note 6 to the Condensed Consolidated Financial Statements), the rates available on new long-term debt, the Company's pool of investors and funding sources, the borrowing costs and margin deposit requirements on the Company's derivative instruments and credit assurance requirements, including collateral, in support of the Company's midstream service contracts, joint venture arrangements or construction contracts. Margin deposits on the Company's derivative instruments are also subject to factors other than credit rating, such as natural gas prices and credit thresholds set forth in the agreements between hedging counterparties and the Company. As ofJuly 22, 2020 , the Company had sufficient unused borrowing capacity, net of letters of credit, under its credit facility to satisfy any requests for margin deposit or other collateral that its counterparties are permitted to request of the Company pursuant to the Company's derivative instruments, midstream services contracts and other contracts. As ofJuly 22, 2020 , such assurances could be up to approximately$1.1 billion , inclusive of letters of credit, margin deposits and other collateral posted of approximately$0.9 billion in the aggregate. The Company's debt agreements and other financial obligations contain various provisions that, if not complied with, could result in default or event of default under the Company's credit facility, mandatory partial or full repayment of amounts outstanding, reduced loan capacity or other similar actions. The most significant covenants and events of default under the debt agreements relate to maintenance of a debt-to-total capitalization ratio, limitations on transactions with affiliates, insolvency events, nonpayment of scheduled principal or interest payments, acceleration of other financial obligations and change of control provisions. The Company's credit facility contains financial covenants that require the Company to have a total debt-to-total capitalization ratio no greater than 65%. The calculation of this ratio excludes the effects of accumulated other comprehensive income. As ofJune 30, 2020 , the Company was in compliance with all debt provisions and covenants.
See Note 6 to the Condensed Consolidated Financial Statements for a discussion of the borrowings on the Company's credit facility.
31
--------------------------------------------------------------------------------
Table of Contents
EQT Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Commodity Risk Management
The substantial majority of the Company's commodity risk management program is related to hedging sales of the Company's produced natural gas. The overall objective of the Company's hedging program is to protect cash flows from undue exposure to the risk of changing commodity prices. The derivative commodity instruments used by the Company are primarily swap, collar and option agreements. The following table summarizes the approximate volumes and prices of the Company's NYMEX hedge positions through 2024 as ofJuly 22, 2020 . 2020 (a) 2021 2022 2023 2024 Swaps: Volume (MMDth) 575 467 - 2 2 Average Price ($/Dth)$ 2.74 $ 2.50 $ -$ 2.67 $ 2.67 Calls - Net Short: Volume (MMDth) 200 219 284 77 15
Average
$ 2.89 $ 3.11 Puts -Net Long : Volume (MMDth) 69 57 135 69 15
Average Long Strike Price ($/Dth)
$ 2.40 $ 2.45 Fixed Price Sales (b): Volume (MMDth) 5 72 3 3 - Average Price ($/Dth)$ 2.66 $ 2.50 $ 2.52 $ 2.38 $ - (a)July 1 through December 31 . (b)The difference between the fixed price and NYMEX price is included in average differential presented in the Company's price reconciliation in "Average Realized Price Reconciliation." The fixed price natural gas sales agreements can be physically or financially settled. For 2020 (July 1 through December 31 ), 2021, 2022, 2023 and 2024, the Company has natural gas sales agreements for approximately 6 MMDth, 18 MMDth, 18 MMDth, 88 MMDth and 11 MMDth, respectively, that include average NYMEX ceiling prices of$3.60 ,$3.17 ,$3.17 ,$2.84 and$3.21 , respectively. The Company has also entered into derivative instruments to hedge basis. The Company may use other contractual agreements to implement its commodity hedging strategy. During the three months endedJune 30, 2020 , the Company purchased$54 million of options with the primary purpose of reducing future NYMEX based payments that could be due in 2021, 2022 and 2023 to Equitrans Midstream related to the Henry Hub Cash Bonus (defined and discussed in Note 9 to the Condensed Consolidated Financial Statements) provided for by the Consolidated GGA. See Item 3., "Quantitative and Qualitative Disclosures About Market Risk" and Note 3 to the Condensed Consolidated Financial Statements for further discussion of the Company's hedging program.
Off-Balance Sheet Arrangements
See Note 17 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of the Company's guarantees. 32
--------------------------------------------------------------------------------
Table of Contents
EQT Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Schedule of Contractual Obligations
The following table presents the Company's long-term contractual obligations as ofJune 30, 2020 . Total 2020 (a) 2021 - 2022 2023 - 2024 Thereafter (Thousands)
Purchase obligations (b)
4,763,185 13,737 1,030,129 22,083 3,697,236 Interest payments on debt (c) 1,566,363 124,760 485,589 431,659 524,355 Credit facility borrowings (d) 38,000 - 38,000 - - Lease obligations (e) 49,101 15,248 18,570 15,255 28 Other liabilities (f) 32,668 965 17,403 8,781 5,519
Total contractual obligations
(a)July 1 through December 31 . (b)Purchase obligations are primarily commitments for demand charges under existing long-term contracts and binding precedent agreements with various pipelines, some of which extend up to 20 years or longer. The Company has entered into agreements to release some of its capacity. Purchase obligations also include commitments for processing capacity in order to extract heavier liquid hydrocarbons from the natural gas stream. (c)Interest payments exclude interest related to the Company's credit facility borrowings as the interest rate is variable. (d)The Company's credit facility borrowings were classified based on the credit facility's termination date. (e)See Note 15 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of the Company's lease obligations. (f)Other liabilities are primarily commitments for estimated payouts for various liability stock award plans. See "Critical Accounting Policies and Estimates" herein, Note 11 to the Condensed Consolidated Financial Statements and Note 13 to the Consolidated Financial Statements in the Company's Annual Report on
Form 10-K for the year ended
The Company is currently unable to make reasonably reliable estimates of the period of cash settlement of potential liabilities with taxing authorities related to its total reserve for unrecognized tax benefits; therefore, this amount has been excluded from the schedule of contractual obligations.
Commitments and Contingencies
In the ordinary course of business, various legal and regulatory claims and proceedings are pending or threatened against the Company. While the amounts claimed may be substantial, the Company is unable to predict with certainty the ultimate outcome of such claims and proceedings. The Company accrues legal and other direct costs related to loss contingencies when actually incurred. The Company has established reserves it believes to be appropriate for pending matters and, after consultation with counsel and giving appropriate consideration to available insurance, the Company believes that the ultimate outcome of any matter currently pending against the Company will not materially affect the Company's financial condition, results of operations or liquidity. See Note 16 to the Consolidated Financial Statements and Part I, Item 3., "Legal Proceedings" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 for a discussion of the Company's commitments and contingencies. See also Part II, Item 1., "Legal Proceedings."
Recently Issued Accounting Standards
The Company's recently issued accounting standards are described in Note 1 to the Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates
The Company's significant accounting policies are described in Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been 33
--------------------------------------------------------------------------------
Table of Contents
EQT Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the notes to the Condensed Consolidated Financial Statements. The application of the Company's critical accounting policies may require management to make judgments and estimates about the amounts reflected in the Condensed Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments. Different amounts could be reported using different assumptions and estimates.
See Note 5 for a discussion of the CARES Act, including its expected impact on the Company's methodologies, financial statements and related disclosures.
© Edgar Online, source