EQT may use cash from high gas prices to buy stakes in LNG terminals

EQT Corp. might use some of the cash from higher natural gas prices to buy stakes in LNG export terminals to more directly contract with overseas buyers, the head of America's largest natural gas producer said.

"We are currently in discussions with LNG end users across various geographies and are contemplating equity investment opportunities in LNG export facilities," EQT President and CEO Toby Rice told analysts on an April 28 conference call to discuss first-quarter results. "We are pursuing a portfolio approach from the perspective of liquefication to end markets. Our goal is to have our first LNG contract signed by the end of the year."

In the wake of Russia's invasion of Ukraine, natural gas prices at benchmark European hubs are multiples higher than the U.S. Henry Hub price, and America's LNG terminals are running at capacity to meet global demand.

"There has been a tremendous amount of demand that we've fielded here at EQT over the past few months," Rice said. "What EQT can offer with some of the contracts that we're looking at right now is to reduce the exposure for these international buyers to the volatility that they're experiencing right now."

Mizuho Securities USA LLC analysts liked what they saw. "[The] next step is linking gas pricing to international markets," Vice President Vincent Lovaglio and Director Silvio Micheloto told their clients after earnings were released April 27. "Investment grade credit (and the largest gas-producing position in the U.S.) also position EQT to lead in securing agreements that provide access to international markets and pricing. Every $0.10/Mcf improvement in realized prices is worth [roughly] $200 million of incremental cash flow to our EQT model. TTF (Netherlands) gas prices are currently $20/Mcf-plus 24 months out on the curve."

Rice said that with a fresh investment-grade credit rating, EQT will be able to sign LNG contracts directly with overseas buyers while it pursues a plan to reduce carbon in the climate by replacing coal worldwide with cargoes of U.S. natural gas.

As recently as the CERAWeek by S&P Global industry conference in March, Rice was in talks with Dan Brouillette, president of Sempra Infrastructure at Sempra, developer of the Cameron LNG LLC terminal. "He wants infrastructure built so that he can get his gas to market, and that is something that, to the extent that it's possible to partner with players like EQT, we want to do," Brouillette said then.

For the most part, Wall Street and its analysts were not bothered by the fact that EQT missed expectations for the first quarter. On an adjusted basis, EQT reported income of $334 million, or 81 cents per share, for the quarter, compared to $83 million a year ago. The S&P Capital IQ consensus estimate was for 93 cents per share in adjusted earnings.

EQT shares gained 4% on average volume to land at $41.30 per share near the closing bell April 28.

Underinvestment in pipelines and LNG terminals has caused a structural shift in the U.S. natural gas market, promising elevated commodity prices, Rice said. Over the next five years, higher gas prices will generate $17 billion in free cash flow for EQT, more than the company's current market capitalization, Rice said.

For the first quarter, EQT reported $580 million in free cash flow that can be used to pay off debt or be delivered back to shareholders, more than double the $259 million reported in the first quarter of 2021. At the same time, EQT raised its free cash flow guidance roughly 50% to $2.35 billion for the year on the strength of rising prices.

EQT reported that its gas production had increased 19% to 5.2 Bcf/d compared to the same period of 2021 while realizing a 19% increase in sales prices to $2.97/Mcf, including hedges. The company attributed the volume growth to its May 2021 purchase of northeast Pennsylvania private producer Alta Resources. EQT is guiding to roughly 5.4 Bcfe/d of production in 2022, essentially flat all year with little increase in capital spending.

"We've been pretty vocal about this," Rice said. "Without more pipelines, the prudent thing for us to do is to continue to stay in a maintenance mode."

On a GAAP basis, EQT reported losses of $1.5 billion for the first quarter compared to $37 million in red ink in 2021's first quarter. Driving the loss was a more than $3 billion noncash charge against the value of its hedging portfolio.

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