Fitch Ratings has assigned a 'BBB-'/'RR4' rating to EQT Corporation's two- and five-year senior unsecured notes.

Proceeds are intended to partially finance the acquisition of Tug Hill Operating's upstream assets & XcL Midstream's gathering and processing assets. EQT's Long-Term Issuer Default Rating has been affirmed at 'BBB-'. The Rating Outlook is Stable.

The rating reflects EQT's debt reduction efforts, strong FCF generation, enhanced liquidity, large production scale, high quality inventory, and improved overall operating costs per unit. This is offset by reduced hedging exposure, and exposure to basis differentials, which grow large in some periods.

The Stable Outlook reflects Fitch's expectation of material debt reduction, improved leverage, and continued reductions in operating costs.

Key Rating Drivers

Tug Hill Acquisition: EQT announced that it has entered into an agreement to acquire Tug Hill Operating's upstream assets & XcL Midstream's gathering and processing assets for approximately $5 billion. The transaction is expected to close in the fourth quarter of 2022. Tug Hill's approximately 90,000 acres are adjacent to EQT's West Virginia assets, produce approximately 0.8 billion cubic feet equivalent per day (Bcfe/d) and have 90,000 net core acres with 11 years of inventory. The transaction will be financed with $2.6 billion cash from a proposed term loan and senior unsecured notes offering and the issuance of 55 million shares of EQT stock to the sellers.

Fitch views the transaction as a modest positive given the greater production scale, higher liquids cut, low cost structure, midstream diversification and ability to link to EQT's assets, and leverage neutral financing. Fitch views the transaction as more expensive than EQT's other more recent transactions in terms of price to production and acreage given the rise in natural gas prices. The short-date maturities of the proposed debt offerings reflect EQT's desire to use FCF to quickly repay debt associated with the transaction.

Debt Reduction Management: Pro forma for the transaction, EQT plans to reduce debt by $4 billion through YE 2023. The company has reduced debt by approximately $830 million 2022 YTD. EQT is targeting a 1.0x-1.5x long-term leverage target based on a $2.75/mbtu gas price. As part of its capital allocation plan, the company has a $2 billion share repurchase program through 2023 and has implemented a $0.60/share fixed annual dividend. Fitch believes free cash flow under its base case commodity price deck is more than sufficient to meet these targets.

Strong FCF Generation: Fitch expects EQT to generate material FCF over the forecasted horizon based on Fitch's base case price deck and Strip pricing scenarios. FCF will be driven by increased scale following its recent and pending acquisitions, lower operating costs per unit, a lower decline rate that allows for more efficient capital spending, and improved realized pricing. EQT has reduced its hedging program, which is beneficial in the near term in a stronger natural gas pricing environment, but could pose some risk if natural gas prices were to materially decline. Fitch believes the company's overall debt reduction and improvement in operating costs offsets the risk of lower prices on FCF.

Robust Liquidity: EQT's current liquidity is supported by a $2.5 billion unsecured revolver that matures in June 2027. The revolver is not subject to semi-annual borrowing base redeterminations. Fitch's expectation of positive FCF over the forecast period will likely limit utilization of the facility to support working capital swings. The proposed term loan would be the next maturity in 2024, and the company will have material maturities each year through 2031, although Fitch believes addressing this maturity wall is achievable.

Relatively High G&FT Costs: EQT's firm transportation (FT) and gathering and transmission costs are relatively high compared with other Appalachian natural gas producers. The company has taken steps to rationalize its firm transportation portfolio to improve costs while maintaining direct access to markets with greater realized prices and growing demand. Fitch expects these costs on a unit basis will continue to decline over the forecasted period from the company's increase in scale, pending midstream acquisition, and pending roll-off of midstream contracts.

Leading Size and Acreage: EQT is the largest gas producer in the U.S. with 2Q22 average daily sales volume of 5.5 Bcfe/d and 6.3 Bcfe/d when including the pending acquisition. Estimated proved reserves were 25 trillion cubic feet equivalent (Tcfe), or 28.3 Tcfe including the acquisition, which is significantly higher than gas-weighted E&P peers.

The company has one of the best land positions in the Marcellus, given its extensive contiguous acreage position, including 470,000 net core acres in the Southwest Pennsylvania Marcellus, 290,000 net core acres in the West Virginia Marcellus, and 180,000 net core acres in the Northeast Pennsylvania Marcellus, which are prior to the pending acquisition. EQT estimates it has 1,800 core undeveloped drilling locations, providing an inventory of more than 15 years of drilling at the current maintenance drilling pace. The acquisition adds an additional approximately 90,000 core net acres and approximately 300 core net locations.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Henry Hub natural gas price of $6.25 mcf in 2022, $4.00 in 2023, $3.25 mcf in 2024, and $2.75 mcf over the long term;

WTI oil price of $100/bbl in 2022, $81 in 2023, $62/bbl in 2024, and $50/bbl over the long term;

Organic production increases in the low single-digits over the forecasted horizon;

Annual Capex of $1.6-$2.0 billion over the forecasted period;

Stock repurchases of $2 billion in the 2022-2023 period and $0.2 billion of annual dividends

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Mid-cycle debt/EBITDA below 1.5x;

Improvement in Fitch-calculated netbacks, particularly from lower firm transportation and gas gathering costs per unit;

Increased diversification with continued credit-neutral funding policies.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Failure to meet debt reduction targets of $1.5 billion by end of 2023;

Change in financial policies including acquisitions, stock buybacks and/or dividends that result in deterioration of credit metrics;

Mid-cycle debt/EBITDA above 2.0x on a sustained basis;

Sustained erosion in natural gas fundamentals that leads to reduction in liquidity, complicating the capital structure, or operational adjustments resulting in a reduction of long-term production levels.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Adequate Liquidity: At June 30, 2022, EQT's liquidity was comprised of cash on hand of $44 million, and availability of approximately $2.2 billion on the company's $2.5 billion senior unsecured revolver after accounting for borrowings of $100 million and LOCs of approximately $208 million. The revolver is due June 2027 and has a one-time expansion option up to $3.0 billion, subject to lenders' approval. The only financial covenant on EQT's revolver is a maximum debt-to-capitalization ratio of 65%, which has a carve-out for the effects of other comprehensive income (OCI).

Pro forma for the acquisition and financing transaction, EQT's next material debt maturity is in 2024 for the proposed term loan. Fitch believes the company's expected generation of FCF under its base case commodity price deck should allow EQT to repay and refinance the maturity wall beginning in 2024.

Issuer Profile

EQT is the largest natural gas E&P company in the U.S. with 4Q21 production of 5.728 bcfe/d. The company is primarily focused in the Marcellus play, which includes 1,010,000 core net Marcellus and Utica acres and 1,800 core net locations prior to the contemplated acquisition.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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