EQT Corp (EQT) Update - Dec 28

[dan_s]

The news below is a couple of weeks old, but supports my valuation of EQT. Despite having some "Bad Hedges" to work off, EQT is on a clear path to doubling or even tripling free cash flow from operations from 2021 to 2022.

PITTSBURGH, Dec. 13, 2021 /PRNewswire/ -- EQT Corporation (NYSE: EQT) (the "Company") today announced that its Board of Directors approved a $1.0 billion share repurchase program and has determined to reinstate its regular dividend starting in the first quarter 2022. The Company also announced an updated long-term leverage target.

Key Highlights:

Annual Cash Dividend of $0.50 per share ($0.125 quarterly)

$1.0 Billion Share Repurchase Program

Long-Term Leverage Target of 1.0x - 1.5x < IMO this is the most important goal.

President and CEO Toby Rice stated, "Since joining EQT in July 2019, our team has eliminated approximately $500 million of recurring annual costs from the business, repaired the balance sheet, and repositioned EQT as a highly-efficient, technology-driven operator and the leading producer of natural gas in North America. We have entered the next phase of the sustainable shale era – one that values free cash flow generation, balance sheet strength, emissions reduction and returning capital to shareholders. Now, we are executing on all four of these pillars. With a premier asset base projected to generate approximately $5.6 billion in available cash through 2023 and over $10 billion through 2026 we have ample flexibility to achieve both our debt reduction goals and execute capital return initiatives in any price environment. We are excited to announce the next step in our evolution as we establish the groundwork for a long-term capital returns program to maximize shareholder value creation."

Reinstatement of Cash Dividend
EQT's Board of Directors has approved the reinstatement of the Company's regular quarterly cash dividend, starting in the first quarter of 2022, at an annual dividend rate of $0.50 per share of the Company's common stock ($0.125 per quarter), representing a competitive current yield of approximately 2.5 percent. As is customary, details regarding the record and payment dates for quarterly dividends will be announced at the time such dividends are declared by the Board.

The Company expects to generate approximately $1.9 billion of free cash flow in 2022 and expects to generate an average of approximately $1.6 billion of free cash flow per year from 2023 through 2026 in a flat $3.00 per MMBtu natural gas price environment, providing robust dividend coverage and ample room for future dividend growth throughout commodity price cycles.

Authorization of $1.0 Billion Share Repurchase Program
EQT's Board of Directors has authorized a share repurchase program, under which the Company is authorized to repurchase up to $1.0 billion of its outstanding common stock. The share repurchase authority is effective immediately and valid through December 31, 2023. This program is equivalent to approximately 13 percent of EQT's current market capitalization.

The shares may be repurchased from time to time in open market transactions, through privately negotiated transactions or by other means in accordance with federal securities laws. The Company intends to fund repurchases from available working capital and cash provided by operating activities. The timing, as well as the number and value of shares repurchased under the program, will be determined by the Company at its discretion and will depend on a variety of factors, including the market price of the Company's common stock, general market and economic conditions and applicable legal requirements. The exact number of shares to be repurchased by the Company is not guaranteed and the program may be suspended, modified, or discontinued at any time without prior notice.

Updated Long-Term Leverage Target to 1.0x - 1.5x
As part of the Company's continued commitment to attaining investment grade metrics, the Company has revised its long-term leverage target to 1.0x - 1.5x, measured at the lower of $2.75 per MMBtu flat natural gas pricing or NYMEX strip pricing. To achieve this target leverage, the Company has committed to reducing absolute debt by at least $1.5 billion by the end of 2023, which at current pricing is expected to result in leverage of 1.0x or less.

The Company expects the execution of this plan to result in investment grade financial metrics during 2022, setting the stage for potential credit ratings upgrades and providing maximum future financial flexibility.

[dan_s]

Since EQT's press release on December 13th, four analysts have submitted new reports on EQT to TipRanks.
> Their price targets range from $25 to $35 with an average of $30.25 per share.
> EQT is trading for $22.85 at the time of this post.

My valuation of EQT remains at $35/share.
> Despite lowering my HH natural gas prices to $4.25 for Q4 2021 and $3.50 for 2022 for modeling purposes, EQT is now on a clear path to much higher FCF from operations.
> If they follow through with the plan announced on 12/13 (and I see no reason they won't since it is based on a HH natural gas price of $3.00/MMBtu), this stock deserves a higher valuation multiple.
> I just increased the multiple used to value EQT from 4.0X to 4.5X operating cash flow per share. This is still a low multiple for a company of this size that has a massive amount of running room.
> When I roll forward my forecast/valuation models to include 2023, my valuation will go even higher.
> The new dividend won't attract many income investors, but the stock repurchase plan and the steady debt reduction should draw a lot of value investors.
> Timing: EQT closed the Alta Resources Acquisition on July 21, 2021, so Q4 will be the first full quarter since the addition of close to 1 Bcfe per day of production that should have EQT's production near 5.7 Bcfepd heading into 2022. EQT is the largest producer of natural gas in America by a wide margin.

My updated forecast/valuation model will be posted to the EPG website this afternoon.