EQT merged with Rice Energy but the debt problems remain
From an Article by Nick Cunningham, Oil-Price.com, January 14, 2020
The largest natural gas driller in the United States just announced a massive write-down for its assets, offering more evidence that the shale sector faces fundamental problems with profitability.
In a regulatory filing on Monday, Pittsburgh-based EQT took a $1.8 billion impairment for the fourth quarter, as the natural gas market continues to sour. EQT said that the write down comes as a result of the “changes to our development strategy and renewed focus on a refined core operating footprint,” which is a jargon-y way of saying that some of its assets are now worth much less.
EQT also slashed spending for 2020 to between $1.25 and $1.35 billion, down by another $50 million compared to the guidance the company provided in the third quarter of last year.
Although not a household name, EQT is the largest gas producer in the country, and is a giant in the Marcellus shale. EQT purchased Rice Energy in 2017, growing into a huge gas producer and pipeline company, but it has posted disappointing results in the last few years. The poor performance led to an internal battle for control of the company. Toby Rice, who co-founded Rice Energy and maintained small ownership stakes in EQT after the tie up, wrestled control from management, convincing the company’s board that he could right the ship. He became CEO last year.
So far, the company’s problems continue. Natural gas prices slid sharply in 2019, and are at rock-bottom levels, particularly for the time of year. According to the FT, while Henry Hub natural gas prices for February delivery trade at $2.24/MMBtu, they are only trading at around $1.83/MMBtu at the Dominion South hub in Pennsylvania.
EQT itself admits that it can’t succeed in this environment. “Gas prices are down. It has a big impact, the difference between $2.75 gas and $2.50 gas,” Toby Rice said in December “A lot of this development doesn’t work as well at $2.50 gas.”
EQT hopes to cut $1.5 billion in debt by selling assets and boosting cash flow. However, the cash flow part will be hard to pull off with prices stuck in the doldrums.
Moody’s cut EQT’s credit rating on Monday to Ba1 with a negative outlook, moving it into junk territory after the gas giant said it would issue new bonds to refinance debt. “EQT’s significantly weakening cash flow metrics in light of the persistent weak natural gas price environment and the company’s intent to refinance its 2020 maturities in lieu of debt reduction through repayment drives the ratings downgrade,” Moody’s senior analyst Sreedhar Kona said.
The agency also noted the “volatility associated with the cash flow of pure-play natural gas producers necessitate a higher retained cash flow to debt ratio threshold than EQT can deliver over the medium term even with significant debt reduction.”
“Additionally, EQT’s cash flow metrics compare poorly to other Baa3 rated oil producing companies, despite EQT’s size and scale,” Moody’s concluded. EQT’s share price is down by more than half since last spring, and it is also down by more than 75 percent since 2017.
These problems are obviously much larger than EQT. Range Resources recently slashed its dividend in order to pay off debt, while also taking out another $550 million in new debt in order to pay off maturing debt this year. Meanwhile, Chesapeake Energy, the second largest gas producer, is now trading at pennies on the dollar and faces the prospect of being delisted from the New York Stock Exchange.
EQT’s predicament reflects the broader financial questions that have long plagued the shale industry. Fracking can produce lots of oil and gas, but steep decline rates make profits elusive. If the largest gas producer in the country is struggling, and has a credit rating in junk territory, then something is wrong with the business model.
The problems endemic to the shale gas industry are starting to affect production. The decade-long boom in gas production from Appalachia may have finally come to a halt.
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See also: BlackRock makes climate change central to its investment strategy – The Washington Post, January 14, 2020
Over the past year, Pope Francis met with chief executives and board chairs of leading oil and gas companies and financial firms, including CEO Fink of BlackRock, and urged them to take steps to curb climate change. Activists have launched a campaign called “Stop the Money Pipeline.” And investors have flocked increasingly to mutual funds or money managers who screen out shareholdings in fossil fuel companies.
“This is a major, major crack in the dam,” said Bill McKibben, a writer and climate activist who was arrested last week at a protest at a Chase bank in the District. “The financial powers in New York have tried to ignore climate risk, but that’s now impossible; the pressure from activists, and from the climate chaos in the real world, is simply too great.”
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{ 3 comments… read them below or add one }
Gotta admit, I read this with with the expression of a cat licking cream off its whiskers. Total shadenfreud, after watching EQT sue Fayette County twice, successfully, when the county had the nerve to ban fracking waste injection wells (after a rash of birth defects followed a spill).
No, no, the courts ruled, EQT has a right to inject its poisons wherever it pleases, no place has the right to refuse — and then when it refused to grant an exception to the zoning its planning team has spent years developing, so EQT’s MVP could put a compressor station on a remote hilltop (silly Commissioners! Of course EQT has the right to put a polluting compressor station anywhere it pleases, and “no” is not an acceptable answer).
May their junk bond status lead to total bankruptcy. That means they’ll never cap their wells of course, but let’s face it — very few wells will be capped by the companies. If the people harmed by leaking gas wells want them capped, they’ll have to come up with the tens of thousands of dollars to cap them themselves.
That’s how capitalism works. Getting rich requires that you dump some of your costs on other people.
Mary Wildfire, Roane County, WV
PA Permit Violation Issued to Rice Drilling B Llc in Aleppo Twp, Greene County
Description: Environmental Health & Safety violation issued on 2020-04-01 to Rice Drilling B Llc in Aleppo Twp, Greene county.
78a83(g) – CASING AND CEMENTING – SURFACE AND COAL PROTECTIVE CASING AND CEMENTING PROCEEDURES – Operator failed to set and cement a coal protective string of casing thru workable coal seams. Failure to install base of coal protective casing at least 30 feet below lowest workable coal seam and install at least two centralizers , one within 50 feet of casing seat and second within 100 feet of surface.
Incident Date/Time: 2020-04-01 00:00:00
Tags: PADEP, frack, violation, drilling
EQT Restarts Fracking Ops After Worker Diagnosed with COVID-19
From the Marcellus Drilling News (MDN), March 31, 2020
Last week MDN told you that a contractor working in EQT’s hydraulic fracturing (“completions”) operation who had worked at a site in Belmont County, OH tested positive for COVID-19 coronavirus (see EQT Stops Fracking After Worker Gets COVID-19; Suspends Dividends).
Because the worker had been in contact with a number of other workers in EQT’s completions unit, the company temporarily shut down all completions (fracking) operations until the expiration of a 14-day waiting period based on when the worker had come in contact with others. The wait is over. On Sunday EQT restarted fracking and completions operations.
https://marcellusdrilling.com/2020/03/eqt-restarts-fracking-ops-after-worker-diagnosed-with-covid-19/
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PA Permit Violation Issued to Eqt Prod Co in Nottingham Twp, Washington County
Description: Environmental Health & Safety violation issued on 2020-05-19 to Eqt Prod Co in Nottingham Twp, Washington county. 78.57(a) – CONTROL, STORAGE AND DISPOSAL OF PRODUCTION FLUIDS – Operator failed to collect the brine and other fluids produced during operation, service and plugging of the well in a tank, pit or a series of pits or tanks, or other device approved by the Department or Operator discharged brine or other fluids on or into the ground or into waters of the Commonwealth.
Incident Date/Time: 2020-05-19 00:00:00
PA Permit Violation Issued to Eqt Prod Co in Nottingham Twp, Washington County
Description: Environmental Health & Safety violation issued on 2020-05-19 to Eqt Prod Co in Nottingham Twp, Washington county. SWMA 301 – MANAGEMENT OF RESIDUAL WASTE – Person operated a residual waste processing or disposal facility without obtaining a permit for such facility from DEP. Person stored, transported, processed, or disposed of residual waste inconsistent with or unauthorized by the rules and regulations of DEP.
Incident Date/Time: 2020-05-19 00:00:00