EQT Corporation

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

EQT Corporation is a leading independent natural gas producer in the Appalachian Basin, focused on production, gathering, and transmission, and is committed to being an important part of the clean energy transition.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

EQT’s core business revolves around the extraction and delivery of natural gas from the Appalachian Basin. This region, known for its vast reserves, represents a significant portion of the United States’ natural gas production.

Business Overview:

EQT’s operations are broadly segmented into three areas:

  • Production: This is the core of EQT’s operations, encompassing the drilling, extraction, and processing of natural gas from its extensive leasehold in the Appalachian Basin, primarily consisting of the Marcellus and Utica shale formations.
  • Gathering: This segment involves the midstream activities, such as constructing, operating, and maintaining a network of gathering pipelines and processing facilities to transport and treat raw natural gas from the wellhead to a larger infrastructure.
  • Transmission: This involves the ownership and operation of interstate natural gas pipelines, mainly the Mountain Valley Pipeline and Mountain Valley Pipeline Southgate. This transportation network provides access to major demand centers.

EQT’s business model is fundamentally dependent on the price of natural gas, a commodity subject to significant volatility. However, the company is attempting to move towards stable and reliable profits through vertical integration.

Industry Trends and Competitive Landscape:

  • Natural Gas Demand: There’s an increasing demand for natural gas both domestically and globally, driven by its role as a cleaner energy source compared to other fossil fuels, and as a transition fuel in the shift toward renewable energy. EQT is well-positioned to benefit from this demand as the US emerges as a major exporter of LNG.
  • Appalachian Basin Dominance: The Appalachian Basin is a highly concentrated region for natural gas production, with a few major players. EQT has a significant position and competitive advantage here by having extensive leaseholds. However, competition is fierce with other major producers.
  • Technological Advancements: Continuous improvements in drilling and extraction technologies have been key to unlocking unconventional natural gas resources. Efficient extraction methods as well as advancements in data analysis have enabled companies to optimize production and reduce operating costs.
  • Emphasis on Reducing Methane Emissions: The industry is increasingly focused on reducing methane emissions, with regulatory pressures and increasing incentives to adopt carbon capture, methane monitoring, and other emission control technologies.
  • Market Instability: The volatility of energy prices makes long-term forecasts difficult. A shift to renewable energy production has introduced uncertainty about the demand for natural gas in the long term.
  • Shift to LNG Exports: Demand for natural gas in Europe is increasing as a result of geopolitical turmoil, and increased export capacity is being developed in the US to take advantage of this demand.
  • Government Regulations: Both federal and state regulators are increasing their scrutiny of natural gas producers and transportation. The focus on safety and methane emissions is particularly strong.

What Makes EQT Different?:

  • Scale and Efficiency: EQT has positioned itself as one of the largest natural gas producers in the U.S., with large leasehold and infrastructure, which allows for economies of scale and efficient operations.
  • Integrated Operations: Unlike many of its peers, EQT has a unique level of vertical integration with a production, gathering and long distance transportation network. This minimizes the reliance on other mid-stream providers, and provides stability over the whole chain of the natural gas business. This, coupled with strong relationships within local markets provide the company with some defense to the entry of new competitors.
  • Focus on Responsible Operations: EQT is increasing its emphasis on sustainability, methane emissions reduction, and community engagement. While others are looking towards a move to cleaner energy production, EQT is building itself to be one of the largest and most responsible producers in its industry.

Moat Analysis (3/5): EQT’s moat is best described as “narrow and deepening” due to a combination of advantages:

  • Scale and Efficiency (Cost Advantage): As one of the largest natural gas producers, EQT benefits from economies of scale in production, gathering, and transportation, as well as favorable access to key resources. This allows EQT to achieve lower costs per unit of production when compared with some smaller peers.
  • Network Effect (Midstream): The ownership and control of midstream infrastructure, including gathering and transportation pipelines, forms something of a network effect. In certain situations, it may be difficult for other companies to compete with the scale and convenience of EQT’s existing network.
  • Intangible Assets (Brand): While not as strong as brands in the consumer industry, EQT has cultivated a respectable brand within the oil and gas business, which could attract talent, and attract partnerships.

  • Economic Moats: The high entry costs into the oil and gas business are quite protective, as is the difficulty in replicating their unique transportation network.

    • The moat is not considered “wide” because there is no pricing power, all competitors have access to similar technologies, and there are many large companies in this space.

Risks to the Moat:

  • Commodity Price Volatility: A major risk to EQT’s moat lies in the volatility of natural gas prices. The company is a price-taker and, therefore, subject to price fluctuations in the energy market.
  • Environmental & Regulatory Risk: Regulations or taxes could impede EQT’s operations or increase costs, thereby hurting the moat. The possibility of a tax on methane emissions, or limitations on fracking, are real risks to future earnings. Furthermore, public perception of natural gas, in its role in climate change, may decrease market demand, and thus, negatively influence value for the company.
  • Competition: The energy industry is fiercely competitive, with many other large natural gas companies operating in the Appalachian Basin. If smaller companies can find cheaper methods to extract gas, EQT’s economic moat could be eroded.
  • Technology Disruption: The possibility of a new technology emerging that renders natural gas obsolete poses a major risk to the company.
  • Geopolitics: The war in Ukraine has changed trade patterns, and shifted demand for the commodity. Russia is a major producer and exporter of natural gas, whose supply is subject to political will.

Business Resilience:

  • Long-Life Assets: EQT’s investments into pipelines create a durable advantage over the long run, making its infrastructure more resilient to temporary downturns.
  • Diversified Operations: Vertical integration allows for the company to remain somewhat insulated against outside changes.
  • Transition to Clean Energy: The transition to clean energy will require a long and arduous process. Natural gas will be a transition fuel in this process. Also, the company’s push for producing lower emission natural gas, and reducing methane emissions will also contribute to continued operations into the future.
  • Experienced Management Team: EQT has been under the direction of some very talented people who are committed to driving value for shareholders by achieving operational efficiency and embracing a philosophy of long-term value creation, which should help navigate unexpected situations.

Financial Analysis:

  • Revenues: EQT’s revenue is heavily dependent on natural gas prices and volumes. The company’s earnings are not a smooth trend, they are very volatile, fluctuating with market prices.
  • Profitability: EQT’s profitability has fluctuated widely over time, largely depending on the price of natural gas. As the company integrates the Mountain Valley Pipeline, profitability is expected to stabilize with steady, recurring revenue.
  • Return on Invested Capital (ROIC): The company’s ROIC is highly variable and has swung wildly. The average adjusted ROIC from 2017-2023 was 5.1 percent. Due to high capital expenditures, the company has shown difficulty in reaching the cost of capital.
  • Debt Levels: EQT has substantial debt, largely related to investments in its midstream and transmission operations.
  • Acquisitions: EQT has been making strategic acquisitions and divestitures to enhance its portfolio and future prospects.

EQT’s financial performance is closely tied to the price of natural gas and its ability to generate revenue. Its ability to maintain long term value is highly dependent on its ability to reduce risk from volatile prices and the potential for future regulation.

Understandability (3/5):

EQT’s business model is complex, involving several stages of natural gas production, gathering, and transmission. This makes it moderately difficult for new investors to understand the inner workings of the company, especially regarding its unique operations. However, the basics of the business model (extract gas, sell it, transport it to others) is relatively straightforward.

Balance Sheet Health (3/5):

  • The company has a high amount of debt, partially because it just recently completed the Mountain Valley Pipeline. It should take some time for the company to reduce its debt levels.
  • EQT has had some negative ROIC over the past several years, which is partially attributable to the high capital spending, but also poses a risk.
  • The company has a very low debt to equity ratio, which means the company relies primarily on equity for its funding, and might face some hurdles with acquiring new business or operations. The debt to equity ratio also helps the company weather volatility in the market.

Recent Concerns, Controversies, and Management’s Response:

  • Mountain Valley Pipeline (MVP): The long-delayed MVP project has been a massive headache for the company, plagued by regulatory hurdles and cost overruns. While the pipeline is now in service, concerns regarding the risk of operating the pipeline and the costs involved are still relevant. Management has had the difficult task of re-negotiating the deal and still ensuring it is valuable to shareholders. It has been difficult, and will remain difficult for management to ensure it generates returns that justify the cost.
  • Methane Emissions: Management is facing increasing pressure to reduce methane emissions. This can impose significant costs on the company in order to update its operations and meet regulations. Management views these changes as an opportunity, and is attempting to position itself to meet regulations while still being profitable.

Conclusion

EQT is a major player in the natural gas industry with a narrow moat that it must protect and extend. The company’s vertical integration provides some stability, but it is still largely dependent on the highly volatile prices of gas. While the company is taking action to diversify, and embrace new technologies, it must make significant changes to maintain and grow its profitability in the future. While it is not an easy market to navigate, EQT has positioned itself with its infrastructure, size and knowledge to do so.