EQT nearing decision on possible split
Drilling operations would be separate
EQT Corp. will announce in the next two weeks a plan that will likely separate its oil and gas drilling business from the pipeline infrastructure side, the company said on Thursday.
It’s been months in the making and nudged along by an activist shareholder campaign last year that tried to use EQT’s acquisition of Rice Energy Inc. as leverage to force the split.
In a call with analysts on Thursday, EQT’s CEO Steve Schlotterbeck said what many executives of integrated companies say: he believes the company’s stock is undervalued and a plan to address a so called “sum of the parts discount” will be enacted on an “accelerated basis.” He declined to say what accelerated means.
Downtown-based EQT released its 2017 financial results on Thursday, reporting net income of $1.5 billion, or $1.47 per share for the past year. That’s up from a loss of $453 million, or 33 cents per share during 2016.
The huge swing was helped along by some hefty tax benefits resulting from the recently enacted federal tax overhaul.
EQT will be $1.2 billion richer as its deferred tax liability — taxes it was expecting to pay at the former corporate rate of 35 percent — is revalued at the new rate of 21 percent. It also expects up to $400 million in tax refunds over the next two years.
Company leaders said during the earnings call that stock buybacks and dividends are likely in the near future.
EQT also announced that it completed its integration with Rice Energy’s employees, keeping 150 of them on the drilling and fracking side, and another 125 in midstream operations. Rice had more than 500 at the time the deal closed in November.
Try as analysts might during the earnings call, EQT’s executives wouldn’t say much about the upcoming sum-of-the-parts-discount decision, but it’s clear by the 10 percent stock jump on Thursday that investors are welcoming it as good news.
Welles Fitzpatrick, an oil and gas analyst and managing director with SunTrust Robinson Humphrey, explained why that might be during Hart Energy’s Marcellus-Utica Midstream conference in Pittsburgh last month.
He showed a Venn diagram with the left-hand circle populated by
investors in Marcellus oil and gas development firms, including EQT, and the right-hand circle by investors of Appalachian midstream companies, including EQT’s spinouts EQM, EQGP, and the Rice Midstream Partners. The overlap was negligible.
For Mr. Fitzpatrick, it was a clear indication that the kinds of investors attracted to the higher-risk exploration and production companies probably don’t understand how to value the more stable master limited partnerships that hold pipeline assets. The same is true in the opposite direction, he said.
“Anytime that you bundle two things, it’s going to be at a little bit of a discount,” he said. “Obviously, having the two separated is the best path.”
While integration might make sense from an operations standpoint, Mr. Fitzpatrick’s presentation allowed, drilling and pipeline “investments are awkward bedfellows.”
Jerry Ashcroft, president of midstream at EQT who also spoke at the pipeline conference last month, said he’s often asked by potential investors which EQT companyis the right fit for them.
On Thursday, Mr. Aschcroft told investors that EQT’s various pipeline projects are proceeding well. The Mountain Valley Pipeline, a 303-mile, $3.5 billion pipeline that is expected to be operational by the end of the year, has started construction in West Virginia and Virginia, hesaid.
Another $450 million pipeline, called the Hammerhead, is being planned to start ferrying gas from southwestern Pennsylvania to West Virginia in late 2019.
EQT executives said they will hold another call with analysts after they make the announcement about the future structure of the company by the end of the month.