EQT Corp. (EQT) Valuation Update - Mar 15

[dan_s]

Here is recent news that is impacting my valuation of EQT.

PITTSBURGH, March 4, 2024 /PRNewswire/ -- EQT Corporation (NYSE: EQT) ("EQT" or the "Company") today announced it made the strategic decision to curtail approximately 1 Bcf per day of gross production beginning in late February in response to the current low natural gas price environment resulting from warm winter weather and consequent elevated storage inventories. The Company expects to maintain this curtailment through the month of March and will reassess market conditions thereafter. Curtailments are expected to total approximately 30 to 40 Bcf of net production during the first quarter.

The merger with Equitrans Midstream does not impact my 2024 forecast because don't think it will close until late December.

PITTSBURGH, March 11, 2024 /PRNewswire/ -- EQT Corporation ("EQT") (NYSE: EQT) and Equitrans Midstream Corporation ("Equitrans") (NYSE: ETRN) today announced that they have entered into a definitive merger agreement creating a premier vertically integrated natural gas business, with an initial enterprise value over $35 billion, that is well positioned to be a globally competitive American energy leader. The combined company will have a peer-leading cost of supply, durable free cash flow in all price environments, and significant synergy potential.

EQT President and CEO Toby Z. Rice stated, "Equitrans is the most strategic and transformational transaction EQT has ever pursued, and we see this as a once in a lifetime opportunity to vertically integrate one of the highest quality natural gas resource bases anywhere in the world. As we enter the global era of natural gas, it is imperative for U.S. natural gas companies to evolve their business models to compete on the global stage against vertically integrated rivals. We have identified multiple, high confidence near-term synergies, with significant upside from future infrastructure optimization projects that we believe will drive material value creation for shareholders over time. Our modern, data-driven operating model, first-hand knowledge of Equitrans' operations and successful track record integrating $9 billion of acquisitions, all of which included midstream assets, gives me tremendous confidence in EQT's ability to seamlessly combine the two companies and capture synergies."

"This strategic transaction with EQT is the culmination of an exhaustive process conducted by the ETRN board to determine the best strategic path forward for our shareholders, employees, and stakeholders," said Thomas F. Karam, Executive Chairman, Equitrans Midstream. "Combining with EQT creates a premier vertically integrated natural gas business that is a game changer for the natural gas industry and Appalachian Basin. The transaction delivers full and fair value to ETRN shareholders and provides the opportunity to participate in future value growth as EQT executes on its strategy. We are proud of our employees who have worked hard to build one of the leading midstream companies in the Appalachian Basin. And we are excited for the future with EQT."

Compelling Strategic and Financial Benefits

Creates America's first large-scale, integrated natural gas producer with an unrivaled low-cost structure that provides investors with the best risk-adjusted exposure to natural gas prices

Provides >2,000 miles of irreplaceable pipeline infrastructure with extensive overlap and connectivity in EQT's core area of operations

Combined company will have 27.6 Tcfe of proved reserves across ~1.9 million net acres with 6.3 Bcfe/d of net production and >8.0 Bcfe/d of gathering throughput across >3,000 miles of pipeline

Provides pathway to reduce EQT's long-term corporate free cash flow breakeven(1) to less than $2 per MMBtu, ensuring robust free cash flow generation through all parts of the commodity cycle

Unlocks upside to gas price volatility as pro forma cost structure reduces hedging requirements, positioning EQT shareholders for unmatched price upside

Cost structure integration materially improves economics of EQT's remaining ~4,000 drilling locations, unlocking industry leading terminal value

Mitigates operational execution risk with ~90% of operated production flowing through EQT-owned midstream assets on a pro forma basis

Significantly accretive to free cash flow per share; projected pro forma 2025 to 2029 cumulative free cash flow generation of approximately $16 billion at recent strip prices

Unlocks Meaningful Value

Symbiotic nature of the assets is expected to drive $250 million of annual synergies

Financial and corporate costs: ~$120 million per year

Uptime and production optimization: ~$75 million per year

Capital and operating costs: ~$55 million per year

Identified upside pathway to $175 million of additional per annum synergies from optimization of system pressures, integration of water networks, and execution of expansion projects

Integration of contractual volume commitments eliminates $11+ billion of future liabilities, well in excess of assumed debt

Identified low risk path to more than $5.0 billion of near-term debt repayment via $3.5 billion of asset sales and organic free cash flow
Long-term debt target of $7.5 billion

Unwavering commitment to investment grade credit ratings with full vetting of pro forma balance sheet by all three credit rating agencies

Transaction Details

Under the terms of the merger agreement, unanimously approved by the Boards of both companies, EQT will acquire Equitrans in an all-stock transaction. Each outstanding share of Equitrans common stock will be exchanged for 0.3504 shares of EQT common stock, representing an implied value of $12.50 per Equitrans share based on the volume weighted average price of EQT common stock for the 30 days ending on March 8, 2024. As a result of the transaction, EQT's existing shareholders are expected to own approximately 74% of the combined company and Equitrans' shareholders are expected to own approximately 26%.

The transaction is expected to close during the fourth quarter of 2024, subject to required regulatory approvals and clearances, approval of the transaction by shareholders of both EQT and Equitrans, and other customary closing conditions. The transaction closing is contingent on FERC authorizing MVP to commence service. Upon the closing of the transaction, three representatives from Equitrans will join EQT's Board of Directors. EQT's executive management team will lead the combined company with headquarters remaining in Pittsburgh, Pennsylvania.

[dan_s]

My valuation model for EQT is now just a Wild Ass Guess for 2025, since it is hard to tell if the merger with ETRN will actually close in late 2024 and what the impact on EQT's revenues will be. This is where we just have to trust that EQT's management team knows what they are doing. EQT is the 2nd largest producer of natural gas in the U.S.

TipRanks: "In the last 3 months, 14 ranked analysts set 12-month price targets for EQT. The average price target among the analysts is $42.07."

Since the merger with ETRN was announced on March 11th, 9 analysts updated their price targets. The 9 new price targets average $41.11, but they range from $27 to $60. That's a wide gap for a company of this size. The $60 PT is from Doug Leggate at Bank of America Securities who is a highly respected energy sector analyst, rated 5-Stars by TipRanks.

Prior to March 11 my valuation was $41.00.

What's more interesting is how bullish the TipRanks' operating cash flow forecasts are.
2024: $6.80 per share < Very close to my forecast of $6.43 per share.
2025: $9.40 per share < My forecast is $9.05 CFPS
2026: $20.24 per share < To get to this natural gas prices will need to average over $5.00/mcf.
2027: $37.38 per share

Conclusion: If your long-term outlook for natural gas prices is bullish (which mine is) then EQT is worth considering.

My current valuation increased by $2 to $43 per share just because I trust Toby Rice's team. Two years from now it could go over $100 per share if TipRanks' CFPS forecasts are close to accurate.

EQT closed today at $33.43.