Despite EQT Corp.'s promise to send cash flowing to shareholders, investors had a lukewarm reaction to the company's plan to spin off its midstream components and become a pure-play Appalachian shale gas producer.

Shares in the nation's largest natural gas producer lost 3%, to $49.82, on Feb. 21, after EQT said it would sell its gathering and transportation pipeline operations to its affiliated master limited partnership, EQT Midstream Partners LP, along with the ownership interest in Rice Midstream Partners LP that EQT inherited after its November 2017 merger with Marcellus Shale neighbor Rice Energy Inc.

While executives on a Feb, 21 conference call were tight-lipped about how much cash would be generated for the EQT parent as it sells off and slims down, analysts estimated that up to $1 billion is headed EQT's way. Whatever the number, EQT CEO Steven Schlotterbeck promised to return most of that money to shareholders and not chase production growth on top of the 10% to 15% baked into the company's guidance.

"I think that will be our mentality — start with buybacks, get some track record and then implement a dividend policy that is something that we have a high level of certainty about the future of," Schlotterbeck said.

Drilling more wells to juice production above 10% to 15% growth would be "counterproductive," Schlotterbeck said, because the commodities market cannot absorb the surplus. "I think our plan is to be prudent. And if we get some excess cash, then we're going to give it back. We're not going to start drilling the next economic locations in our inventory. "

EQT plans to spend $2.4 billion to grow production to 4 Bcfe/d in 2018 and to generate positive cash flows starting in 2019, the company said. "The company is targeting low-teens growth for the next five years and is expected to generate $2.3 billion to $2.8 billion of free cash flow to be returned to shareholders through stock buybacks and dividends," Schlotterbeck said.

"Bulls continued to point towards the discounted multiple at [the exploration and production arm] and that while energy spin-offs have a poor historical track record, the Midstream Co spin-co is a high-quality asset base that would have a strong investment case on its own," Wolfe Research analyst Josh Silverstein said in a Feb. 16 note to clients. "Bears pointed towards wide-spread ownership, execution risk, or numbers suggesting limited upside."

Before the spinoff was announced, the analyst consensus was that EQT would have more than $1 billion in negative cash flow in 2018 with $615 million in profits, or $2.23 per share, according to S&P Global Market Intelligence data. In the fourth quarter, EQT beat analysts' expectations with adjusted net income of $167.5 million, or 76 cents per share.

EQT shareholders will keep their current shares and get prorated shares in the new midstream umbrella company containing EQT Midstream (merged with Rice Midstream) and its 2% general partner, EQT GP Holdings LP. A name for the new midstream holding company has not been announced, but it will be a C corporation, not a master limited partnership.

The tax-free deals are expected to be completed by the third quarter of 2018. Both EQT and EQT Midstream expect to maintain their investment-grade credit ratings, executives said on the conference call.