EQT Corp (EQT) Update from BofA - Sept 29

[dan_s]

BofA's new price target is $26 for EQT.

Alta starts to exit ownership
Post close, EQT announced a ~25.93mm secondary offering for private equity owners
that received shares as part of the acquisition of Alta Resources (which closed July 21st).
Underwriters also have a 30 day option to purchase an additional ~2.9mm shares.
Together, this represents ~30% of Alta’s former owner’s ~99mm shares in EQT. It is
also >25% sales limit in the S-1 for the first 31-90 days from the transaction close
noting EQT had the ability to waive this condition under certain circumstances. With that
said, with this secondary, there is an additional 30-day lock-up period where Alta’s
former owners are unable to come to market and would be limited up to 25% of their
original ownership which would expire 180 days post close the close of the deal. The
bottom line, we expect any short-term pressure on the shares to be limited to the
offering price, which was announced at $20 (and vs $20.47 at the time of the close). We
see no other impact on the underlying investment case which we continue to rate as our
preferred ‘pure play’ natural gas stock within our coverage.

Begins to remove one overhang on shares
In our view, the announcement begins the process of removing one near-term overhang
on EQT’s story as to when and how do former Alta owners exit their positions. The
other issue is its 2022 hedge position where it has approximately 86% of its natural gas
capped via hedges (based on our projections) limiting exposure to recent gas price
strength that carries into 2022. However should natural gas futures follow the current
curve at ~$3.00 from 2023 at some point, probably between now and the middle of next
year, we would anticipate the market will start to look beyond this hedge position. For
context our ex-growth valuation that remains the basis of our price objective stands at
$26 assumes long-term $2.70 HH gas; this compares with a current 4yr strip closer to
~$3. If we assume the market will ‘discount’ strip, our implied valuation would be much
higher.

Concerns on hedging may present opportunity, Buy
Admittedly, strip is an imperfect indicator of future natural gas prices, while this
sensitivity does not take into account other potential factors such as changes in future
cash taxes or how other producers might react in that environment. However, what it
does demonstrate is EQT’s unhedged torque to higher gas prices. As for the equity
owners of Alta exiting part of their position, this was always anticipated and will improve
market liquidity over time. Beyond this, we see a handful of catalysts for EQT including
an update on the integration of Alta Resources with 3Q21 results, a potential progress
report on efforts to reduce well costs in West Virginia (via combo development), and by
year-end results an outline of its plan on the future return of capital to shareholders.
Taken together we maintain our Buy rating on EQT and $26 PO which we view as
conservative vs current strip.

EQT Corporation (EQT)
Our $26 PO is anchored on our ex growth DCF valuation, which assumes a long-term
commodity deck of $2.70 HH / $56.50 WTI and a WACC of approximately 7.4%. < Note that PT is based on a very low gas price.
Potential upside risks: 1) The possibility it unloads its FT commitments on MVP, 2)
further execution on lower costs and 3) the possibility of a favorable decision related to
its arbitration case regarding Hammerhead.
Potential downside risks: 1) the possibility of a future severance tax in Pennsylvania, 2)
the possibility that service costs could at some point widen, 3) weak natural gas prices
4) Potential difficulty in integrating acquired assets, and 4) the risk that the Alta
Resources transaction is not completed

[Fraser921]

Thank you for the update..short term, I think it goes back up to 22

[Fraser921]

Underwriters exercised the option amount

That means the sales must be mostly done