EQT Sees Clear Path to $5B in Potential Divestments
EQT Corp. executives said that an April deal with Equinor has been a catalyst for talks with potential buyers as the company looks to shed debt for its Equitrans Midstream acquisition.
Darren
Barbee
Oil and Gas Investor
EQT Corp. will prioritize gas curtailments and its divestiture program in the near term while remaining bullish on gas demand in the future from the growth of AI data centers and LNG facilities.
Speaking during an April 24 earnings call, EQT CEO Toby Rice said the company will continue to curtail production in the face of an oversupplied market at least through May. Simultaneously, EQT is upping the urgency to sell assets and reduce debt as it works to close a March 11 deal to buy Equitrans Midstream for $5.45 billion.
The company said it has identified “high confidence” debt-reduction targets of more than $5 billion—largely through asset sales and organic free cash flow.
Asset sales will range from $3 billion to $5 billion. The company has already jumpstarted its divestiture program with an April 5 asset swap with Equinor in the Appalachian Basin. As part of the swap, Equinor will pay EQT $500 million. Rice said the transaction’s value is $1.1 billion when considering synergies, development plan upside and Equinor’s upstream and midstream assets.
EQT CFO Jeremy Knop said the company has since seen momentum pick up with potential buyers.
“The announcement of the deal with Equinor a couple of weeks ago is actually really catalyzing those [discussions] to move even more swiftly,” he said, adding the company is confident that it can get deals done.
Knop said future deals are likely to differ from Norway-based Equinor, which had “other strategic objectives” guiding their exit from U.S. onshore.
“I anticipate the remaining sale of that interest in cash consideration as opposed to a more complex kind of mix of assets and cash,” he said.
Part of EQT’s possible divestiture candidates could potentially be drawn from Equitrans’ assets. The company’s flagship Mountain Valley Pipeline (MVP) recently filed an in-service request with the Federal Energy Regulatory Commission.
Rice said on the call that he expects to see even more natural gas demand in the southeast U.S., and that, as a result, EQT intends to pursue an expansion of MVP through additional compression. Under that scenario, MVP would increase capacity to 2.5 Bcf/d from 2 Bcf/d.
However, Knop previously said that MVP could be a logical divestment candidate as a new, high-quality pipeline with 20-year contracts.
Knop said on the April 24 call that EQT has options and, with the progress it’s made so far in divestments, doesn’t necessarily have to sell Equitrans’ assets. But he cited the attractiveness of the market however, including a $3.8 billion deal by TC Energy to sell 40% of its Columbia Gas and Columbia Gulf systems to Global Infrastructure Partners.
He estimated that Equitrans has a “$7 billion bucket” of value that could be sold off in a variety of ways, including divesting a minority interest in which EQT would maintain control or operatorship.
“There’s a lot of different ways to structure it,” he said.
The key for EQT is to make deals that give the company flexibility in the near- and long-term while ensuring that the company de-levers its balance sheet, which currently holds $4.9 billion in net debt.
Curtailments continue
While plans for integrating Equitrans and asset sales were on analysts' minds, EQT’s core business—producing gas—remains under pressure for now.
Rice and Knop expressed optimism about the natural gas market later in the year.
Despite cutting back gas production and reducing new wells turned to sales, analysts saw a strong beat by EQT on production estimates (by 2%) and EBITDA (by 13%), David Deckelbaum, TD Cowen managing director, wrote in an April 23 commentary.
However, a soft market will extend the company’s production curtailments by 1 Bcf/d for at least the next two months.
EQT's updated 2024 production guidance now ranges between 2.1 Tcfe and 2.3 Tcfe and “bakes in extended curtailments ... as well as expected non-operated production curtailments and TIL deferrals,” Deckelbaum said.
However, he noted that EQT’s capex remains at $2.15 billion to $2.35 billion, translating to $300 million to $500 million of free cash flow at $2.50/Mcf gas.
“We think that you're going to continue to see cuts and discipline from other operators,” Rice said. “I think a lot of eyeballs are focused on what's going to happen with summer weather, you know, with a normal summer that could … tighten up some of the storage overhang we have.”
Lower prices also could encourage more power demand, including coal-to-gas switching for generation.
“We think there's a couple of catalysts here but, in the meantime, until those hit, I think you can continue to see more patience from operators,” Rice said.
Knop said a mild winter saw an additional 400 Bcf added to storage and another 200 Bcf from higher-than-expected production.
“So you have an overhang of about 600 Bcf that has to get worked out by, call it October, and that will happen.”
LNG and power
Despite the current low pricing environment, EQT sees plenty of optimism for the future.
EQT executives said the company is well positioned to serve the growing power demand for domestic data centers. The company said it has already announced physical supply agreements with the largest utilities in the region at premiums to local and Henry Hub pricing.
One competing interest: the lure of lucrative LNG markets. As EQT released its earnings results on April 23, it also said that it had signed a nonbinding heads of agreement with Texas LNG Brownsville for natural gas liquefaction services for an additional 1.5 million tonnes per annum (mtpa) over 20 years, bringing EQT’s tolling capacity to 2 mtpa.
EQT has pipeline capacity to deliver 1.2 Bcf/d—about 20% of its production—to the Gulf Coast to be sold through LNG facilities. In addition to Texas LNG, the company has similar agreements with Lakes Charles LNG and Commonwealth LNG. The deals represent about 45% of EQT’s Gulf Coast exposure.
Rice said EQT sees about 10% of its volumes being exposed to international pricing.
“But, you know, keep in mind these agreements are nonbinding and there’s some work to do to get the terms that allow us to achieve our objectives,” he said.
EQT’s proximity to data center power demand has the company exploring how it can get further exposure there. LNG, which Rice has advocated for, is “more of a tide that is going to raise all ships” move for the company than a strategy it is depending on.
EQT says its proximity to data centers is ideal for growing power demand. (Source: EQT Corp.)
Knop said the company is carefully exploring LNG arrangements, which he likened to midstream contracts that hamstrung some E&Ps in the past decade.
“If you look at the time when the U.S. became an exporter of LNG from 2015 to 2020, that arb was actually negative, right?”
While EQT sees LNG as a positive catalyst, signing up for “too much LNG” and seeing a negative arbitrage on prices could get expensive.
“You can get yourself into trouble with that,” Knop said. “You learn from the past. It’s not the same as pipelines, but it is similar. So we’re taking a very prudent approach to it.”
