Over the weekend I had time to take a hard look at EQT, specifically the impact of the Tug Hill & XcL Acquistions on my Q3, Q4 and 2024 forecasts. The acquisitions are now expected to be closed by August 25. They will add ~800,000 Bcfepd of production and reduce EQT's lease operating, transportation and processing expenses per mcfe. EQT's Q4 production guidance is now 6.1 Bcfepd (~6% liquids), compared to actual Q2 production of 5,174.049 mcfepd.
I am increasing my current valuation by $5 to $47 per share, which compares to TipRanks' consensus price target of $45.03.
EQT closed at $43.47 on August 18.
Timing:
> My valuation is based on my CURRENT commodity price assumptions.
> I believe U.S. natural gas prices will struggle to get to and stay over $3.00/MMbtu during the 2023/2024 winter. A very cold December could make a big difference, but another mild winter could push ngas down to $2.00 again.
> A year from now, I believe the outlook for U.S. natural gas prices will be much better. For example, if EQT's realized natural gas price in 2025 is $5.00/mcf (Raymond James current forecast for HH ngas beyond 2024) the Company could generate close to $20 operating cash flow per share and my valuation would be over $100/share.
Size Matters in this business. EQT is the largest natural gas producer in the U.S. by a wide margin.
My updated forecast/valuation model and our updated profile on the Company will be posted to the EPG website this afternoon.
EQT Corp (EQT) Valuation Update - Aug 20
EQT Corp (EQT) Valuation Update - Aug 20
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: EQT Corp (EQT) Valuation Update - Aug 20
Despite natural gas inventories in Europe being much higher than normal for this time of year, LNG being delivered to Asia and Europe is now back over $11/MMBtu. 6 MMBtu of natural gas has about the same energy content of one barrel of oil.
Brent oil closed at $84.80/bbl on Friday. $84.80 / 6 = $14.33 and $84.40 / 8 = $10.55
My point is that if U.S. gas has more access to the International markets, it too will draw bids closer to the energy content. I forecast that the "Right Price" for U.S. gas will be 1/10th the price of oil because the upstream companies will have to deduct the cost of liquification and transportation to get it to Asia and Europe.
"Back in the Day" when I worked at Hess in Tulsa, U.S. natural gas prices were regularly in the range of 1/6th to 1/10th the price of WTI. Horizontal drilling technology and high pressure fracking created an over-supply of ngas in the U.S. In two years the U.S. gas market will be tight and in four years it will be under-supplied.
------------------------------
Adam Rozencwajg's forecast for U.S. natural gas with my comments in italics.
Natural Gas Markets on the Verge written 8-15-2023
In our view, natural gas prices are reaching a turning point. Gas spiked to decade highs last
spring following Russia’s invasion of Ukraine, only to fall back on milder-than-normal winter
weather. Instead of running out of gas, traders worried about running out of storage as prices
collapsed to near-all-time lows.
During market panic or euphoria, investors make the mistake of linearly extrapolating
current trends. As a result, they fail to see the ground shifting underneath them and miss
out on excellent opportunities. Natural gas represents a classic buying opportunity, and we
believe investors are again focused on all the wrong issues.
Only several weeks ago, we heard many analysts openly question whether the US would run
out of natural gas storage before the end of the injection season. Such an event would create
the dreaded “gas on gas competition,” potentially driving prices to zero (or below). With
the injection season half complete, these concerns were unfounded. Inventories started the
year in line with seasonal averages. Extremely mild weather resulted in nearly 5% fewer
heating degree days between January and April, significantly reducing heating demand.
Inventories grew to 382 bcf above seasonal averages by April. Mild winter weather was
followed by a mild start to summer. Cooling degree days in April, May, and June were nearly
30% below the five-year average, reducing air conditioning demand. Despite the milder
than-normal start to summer, US inventories did not grow relative to seasonal averages. By
mid-June, inventories remained 385 bcf above average. As the weather turned warmer in
July, inventories have started to come down and currently stand at 320 bcf above average, < Down to 299 Bcf over average on August 11
the lowest level since February. Notably, July was 3% milder than average, suggesting the
market would be in an even more significant deficit had temperatures been average.
Liquefied Natural Gas (LNG) exports help explain why US inventories declined relative to seasonal
averages despite mild weather. LNG demand reached a record of 12.5 bcf/d in May as
Freeport returned online after a damaging fire left it inoperable for over a year. Based upon
our analysis, the likelihood of full storage by the end of the injection season in the fall is
very low; gas prices will likely rally from here. < IMO the "rally" will top out at $3.25 and then
all eyes will be on the December weather forecast.
Over the next two years, an additional six billion cubic feet of LNG exports will come online
at Golden Pass, Plaquemines, and Corpus Christi. Another 1.6 bcf/d is due to come online
at Port Arthur in 2027. Where will these facilities source their gas? < AR, CRK, EQT, RRC, SBOW
In our last letter, we explained how the same depletion issues plaguing the oil shales are also
at work in the gas shales. The Marcellus represents 25% of all US dry gas supply and has not
grown in nearly two years. Production peaked in late 2021 at 26.5 bcf/d – almost one bcf/d
higher than current levels. The Permian produces natural gas alongside oil, but declining
productivity across the basin suggests sustained growth will be difficult. < Oil production may go down in the Permian, but gas-to-oil ratios are increasing, so the "Associated Gas" volumes will stay high.
The Haynesville surged to nearly eight bcf/d by 2011 before declining by half through 2017.
Renewed interest led to a second period of growth, until by late 2022, production peaked
at 14.3 bcf/d. Unfortunately, production has now been flat for eight months. The Haynesville
is deep and highly over pressured, resulting in elevated drilling and completion costs.
Companies raced to lay down rigs as prices fell from $7.00 per mcf in December 2022 to
$2.00 by February 2023. After peaking at seventy-two rigs in December, there are now only
forty-four rigs operating in the play, with most of the decline occurring in June. Production
often follows drilling with a several-month lag. If seventy-two rigs cannot produce much
growth in the first few months of 2023, then production will likely fall from here. High
prices would likely incentivize increased drilling in Haynesville, similar to what happened
in 2017. However, the field had only produced 20% of its reserves back then compared with
nearly 50% presently. It will likely be more challenging—if not impossible-- to boost production
this time once basin-level declines take hold, considering it is a much more mature play.
Our models tell us we have overbuilt our LNG export capacity without adequately considering
where the upstream feedstock will come from. US natural gas remains by far the
cheapest unit of energy globally by as much as 75%. Once demand, driven by LNG expansion,
exceeds domestic supply, our expectation is that this discount will evaporate, sending
US gas prices up several-fold, as US prices converge with international prices. < This is the KEY to all long-term bullish forecasts for U.S. natural gas prices.
Turning to Europe, hot summer weather was not enough to offset their record mild winter
(air conditioning in Europe remains less prevalent than in North America). European gas
storage is now 88% full compared with an average of 74% for this time of year – a surplus
of 14 percentage points. While still high, this is much lower than the record set after the
winter on March 26th when inventories reached 56% full, a 22% surplus compared with
seasonal averages. In March, the German energy minister Klaus Mueller warned that Germany
would run out of natural gas by January 2024 on colder than average weather. Considering
inventories at the time were running further ahead of seasonal averages than they are today,
we would expect his concerns have not lessened.
Both US and global natural gas markets rest on a knife’s edge. After last year’s incredibly
mild winter, inventories are no longer at dangerously low levels. However, the longer-term
supply and demand trends point to extreme tightening, particularly in the US. Investors are
extrapolating current trends but missing the significant shifts taking place. They should take
heed. < Important to note that a strong El Nino has formed in the Pacific Ocean and weather forecasters are predicting colder winters in North America and in Europe. Last winter's record mild temperatures cannot be expected to be repeated.
Brent oil closed at $84.80/bbl on Friday. $84.80 / 6 = $14.33 and $84.40 / 8 = $10.55
My point is that if U.S. gas has more access to the International markets, it too will draw bids closer to the energy content. I forecast that the "Right Price" for U.S. gas will be 1/10th the price of oil because the upstream companies will have to deduct the cost of liquification and transportation to get it to Asia and Europe.
"Back in the Day" when I worked at Hess in Tulsa, U.S. natural gas prices were regularly in the range of 1/6th to 1/10th the price of WTI. Horizontal drilling technology and high pressure fracking created an over-supply of ngas in the U.S. In two years the U.S. gas market will be tight and in four years it will be under-supplied.
------------------------------
Adam Rozencwajg's forecast for U.S. natural gas with my comments in italics.
Natural Gas Markets on the Verge written 8-15-2023
In our view, natural gas prices are reaching a turning point. Gas spiked to decade highs last
spring following Russia’s invasion of Ukraine, only to fall back on milder-than-normal winter
weather. Instead of running out of gas, traders worried about running out of storage as prices
collapsed to near-all-time lows.
During market panic or euphoria, investors make the mistake of linearly extrapolating
current trends. As a result, they fail to see the ground shifting underneath them and miss
out on excellent opportunities. Natural gas represents a classic buying opportunity, and we
believe investors are again focused on all the wrong issues.
Only several weeks ago, we heard many analysts openly question whether the US would run
out of natural gas storage before the end of the injection season. Such an event would create
the dreaded “gas on gas competition,” potentially driving prices to zero (or below). With
the injection season half complete, these concerns were unfounded. Inventories started the
year in line with seasonal averages. Extremely mild weather resulted in nearly 5% fewer
heating degree days between January and April, significantly reducing heating demand.
Inventories grew to 382 bcf above seasonal averages by April. Mild winter weather was
followed by a mild start to summer. Cooling degree days in April, May, and June were nearly
30% below the five-year average, reducing air conditioning demand. Despite the milder
than-normal start to summer, US inventories did not grow relative to seasonal averages. By
mid-June, inventories remained 385 bcf above average. As the weather turned warmer in
July, inventories have started to come down and currently stand at 320 bcf above average, < Down to 299 Bcf over average on August 11
the lowest level since February. Notably, July was 3% milder than average, suggesting the
market would be in an even more significant deficit had temperatures been average.
Liquefied Natural Gas (LNG) exports help explain why US inventories declined relative to seasonal
averages despite mild weather. LNG demand reached a record of 12.5 bcf/d in May as
Freeport returned online after a damaging fire left it inoperable for over a year. Based upon
our analysis, the likelihood of full storage by the end of the injection season in the fall is
very low; gas prices will likely rally from here. < IMO the "rally" will top out at $3.25 and then
all eyes will be on the December weather forecast.
Over the next two years, an additional six billion cubic feet of LNG exports will come online
at Golden Pass, Plaquemines, and Corpus Christi. Another 1.6 bcf/d is due to come online
at Port Arthur in 2027. Where will these facilities source their gas? < AR, CRK, EQT, RRC, SBOW
In our last letter, we explained how the same depletion issues plaguing the oil shales are also
at work in the gas shales. The Marcellus represents 25% of all US dry gas supply and has not
grown in nearly two years. Production peaked in late 2021 at 26.5 bcf/d – almost one bcf/d
higher than current levels. The Permian produces natural gas alongside oil, but declining
productivity across the basin suggests sustained growth will be difficult. < Oil production may go down in the Permian, but gas-to-oil ratios are increasing, so the "Associated Gas" volumes will stay high.
The Haynesville surged to nearly eight bcf/d by 2011 before declining by half through 2017.
Renewed interest led to a second period of growth, until by late 2022, production peaked
at 14.3 bcf/d. Unfortunately, production has now been flat for eight months. The Haynesville
is deep and highly over pressured, resulting in elevated drilling and completion costs.
Companies raced to lay down rigs as prices fell from $7.00 per mcf in December 2022 to
$2.00 by February 2023. After peaking at seventy-two rigs in December, there are now only
forty-four rigs operating in the play, with most of the decline occurring in June. Production
often follows drilling with a several-month lag. If seventy-two rigs cannot produce much
growth in the first few months of 2023, then production will likely fall from here. High
prices would likely incentivize increased drilling in Haynesville, similar to what happened
in 2017. However, the field had only produced 20% of its reserves back then compared with
nearly 50% presently. It will likely be more challenging—if not impossible-- to boost production
this time once basin-level declines take hold, considering it is a much more mature play.
Our models tell us we have overbuilt our LNG export capacity without adequately considering
where the upstream feedstock will come from. US natural gas remains by far the
cheapest unit of energy globally by as much as 75%. Once demand, driven by LNG expansion,
exceeds domestic supply, our expectation is that this discount will evaporate, sending
US gas prices up several-fold, as US prices converge with international prices. < This is the KEY to all long-term bullish forecasts for U.S. natural gas prices.
Turning to Europe, hot summer weather was not enough to offset their record mild winter
(air conditioning in Europe remains less prevalent than in North America). European gas
storage is now 88% full compared with an average of 74% for this time of year – a surplus
of 14 percentage points. While still high, this is much lower than the record set after the
winter on March 26th when inventories reached 56% full, a 22% surplus compared with
seasonal averages. In March, the German energy minister Klaus Mueller warned that Germany
would run out of natural gas by January 2024 on colder than average weather. Considering
inventories at the time were running further ahead of seasonal averages than they are today,
we would expect his concerns have not lessened.
Both US and global natural gas markets rest on a knife’s edge. After last year’s incredibly
mild winter, inventories are no longer at dangerously low levels. However, the longer-term
supply and demand trends point to extreme tightening, particularly in the US. Investors are
extrapolating current trends but missing the significant shifts taking place. They should take
heed. < Important to note that a strong El Nino has formed in the Pacific Ocean and weather forecasters are predicting colder winters in North America and in Europe. Last winter's record mild temperatures cannot be expected to be repeated.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: EQT Corp (EQT) Valuation Update - Aug 20
EQT (Finally) Closes $5.2B Tug Hill, XcL Midstream Acquisition
EQT Corp. said on Aug. 22 that it has closed its previously announced cash-and-stock acquisition and XcL Midstream after more than a year of delays caused by regulatory review by the Federal Trade Commission (FTC).
After purchase price adjustments, EQT paid approximately $2.4 billion of cash and 49.6 million shares of EQT common stock.
EQT funded the cash portion with $1.25 billion in term loan borrowings, $1 billion of cash on hand and a $150 million cash deposit previously held in escrow.
The completion of the deal comes just days after the FTC signed off the deal, saying it had resolved certain antitrust concerns between EQT and Quantum Energy Partners.
Hart Energy Staff
Yay!
EQT Corp. said on Aug. 22 that it has closed its previously announced cash-and-stock acquisition and XcL Midstream after more than a year of delays caused by regulatory review by the Federal Trade Commission (FTC).
After purchase price adjustments, EQT paid approximately $2.4 billion of cash and 49.6 million shares of EQT common stock.
EQT funded the cash portion with $1.25 billion in term loan borrowings, $1 billion of cash on hand and a $150 million cash deposit previously held in escrow.
The completion of the deal comes just days after the FTC signed off the deal, saying it had resolved certain antitrust concerns between EQT and Quantum Energy Partners.
Hart Energy Staff
Yay!
Re: EQT Corp (EQT) Valuation Update - Aug 20
If you are long-term bullish of natural gas prices, then you should be building a position in EQT.
I agree with Raymond James' forecast that after 2024, U.S. natural gas prices will move over $5.00/MMBtu. If so, EQT could go to $100/share within 18 months. EQT closed at $43.40 today.
I agree with Raymond James' forecast that after 2024, U.S. natural gas prices will move over $5.00/MMBtu. If so, EQT could go to $100/share within 18 months. EQT closed at $43.40 today.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group