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Rating agency shifts credit outlook to negative for EQT, largest US gas producer

In another sign that predictions of gas prices in the $2.50/MMBtu range are hurting the financial outlook for Appalachia's pure-play gas producers, S&P Global Ratings shifted its outlook on EQT Corp., the nation's largest gas producer, from stable to negative on Aug. 30.

The rating agency has already downgraded three other Appalachian drillers, Range Resources Corp., Gulfport Energy Corp. and Antero Resources Corp., after lowering its average gas price assumption to $2.25/MMBtu for this year and $2.50/MMBtu in 2020. S&P Global Ratings said it expected possible downgrades when it lowered its Henry Hub price assumption on July 29.

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"The outlook revision reflects EQT's weaker-than-anticipated financial measures due to the decline in Henry Hub natural gas prices and the recent reduction in our gas price assumptions," S&P Global credit analyst Ben Tsocanos explained. "The revision also reflects the delay, relative to our expectations, in the company's sale of its 19.9% interest in [Equitrans Midstream Corp.], which it plans to use the proceeds from to repay debt."

The change in outlook increases the pressure on EQT's newly elected CEO and management team to finish their top-to-bottom evaluation of EQT's operations and produce a plan that lowers costs and increases cash flows. EQT said in a Sept. 3 statement that the company is committed to staying investment grade and its new plan will address S&P's concerns. "Our plan is geared toward improving the economics of our development plan by lowering well costs," EQT Vice President for Communications Michael Laffin said in an email. "We understand credit agency outlook given the commodity price backdrop but are confident they will give us time to execute our plan to improve our credit metrics before taking further action. We remain committed to the investment grade rating."

"Being an energy company is tough. Being an E&P is tougher. Being levered to gas is downright soul-crushing," analysts at energy investment bank Tudor Pickering Holt & Co. said Aug. 28.

"The uncertainty that comes with suspended guidance doesn't help the situation, but our 2020 outlook at rough maintenance capex [of $1.23 billion for 4.2 Bcfe/d of production] implies better capital efficiency versus the Street at $1.59 billion and 4.196 Bcfe/d as we expect steady progress towards realizing the $735/foot [drilling and completion] target by mid-2020," the analysts said.

S&P Global Ratings said it would downgrade EQT from its BBB- investment grade rating if its funds from operations went below 30% of debt without a "near-term remedy." Being dropped from investment grade status would have repercussions that ripple through EQT's business, increasing the costs of borrowing and servicing nearly $8.5 billion in long-term debt, $1 billion of which comes due next year. In the most recent second quarter, EQT's funds from operations were 28% of debt, according to S&P Global Market Intelligence.

A quick fix for the ratio between cash flows and debt would be for EQT to sell the 20% stake in Equitrans stock it holds after spinning out its former pipeline and processing assets. That stake had a market value $672 million on Aug. 29 after losing 31% over the last year. S&P Global Ratings sympathized with management's desire to get a better value but stuck to its own solution: sell and avoid a downgrade.

"We view EQT's sale of its ownership stake in [Equitrans] and its plan to use the proceeds to reduce its debt as an important element of our expectation for moderating leverage," S&P Global Ratings said. "[Equitrans'] equity price has declined significantly this year and management is reluctant to sell at what they view as a discounted valuation."

The rating agency said it would consider revising EQT's outlook back to stable if the ratio between funds from operations and debt went "comfortably" above 30%. EQT could get to that number if commodity gas prices improve and EQT's new corporate plan resulted in even lower costs as the company sold the Equitrans stake, S&P Global Ratings said.

Tudor Pickering Holt analysts see nearly $2 billion worth of assets for EQT to sell, many of those in its vast leaseholds in the Marcellus and Utica shales, which it will not drill for years as it settles into maintenance mode while prices are low.

"A focus on portfolio optimization should help improve the balance sheet and open the door for shareholder returns," Tudor Pickering Holt said Aug. 28. "Fully capturing the potential gathering savings and executing on all potential asset sales would bring YE'20 leverage down to 1.8x at current strip and allow management to execute on TPH-estimate ~$300MM of share repurchases (12% of market cap) while remaining within its 2x leverage target."

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.