Fitch Affirms EQT's Ratings at 'BBB-'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed EQT Corporation's EQT Long-term Issuer Default Rating (IDR) and senior unsecured notes at 'BBB-'. The Rating Outlook is Stable.

Approximately $2.5 billion in debt is affected by today's rating action. A full list of rating actions follows at the end of this release.

KEY RATINGS DRIVERS

EQT's ratings are supported by quality assets, reasonable credit metrics, and an ample liquidity position at March 31, 2015. Significant production growth opportunities in the Marcellus shale and low upstream operating expenses provide EQT with profitable gas production opportunities even in a lower natural gas price environment.

ROBUST UPSTREAM GROWTH

EQT has increased production volumes on a 36% CAGR since 2010, and produced 218 mboe per day in 2014. First-quarter production was 268.9 mboe per day, 90% natural gas. Fitch expects gas production growth to remain strong in 2015. While natural gas pricing in the Marcellus has seen negative basis differentials in recent periods due to local oversupply conditions, continued Marcellus midstream infrastructure build-out should help to support current and future development, which should tighten up basis in future periods as the play matures. EQT is also working to diversify end-market gas placement and improve access to higher priced markets over the next few years. Fitch expects that EQT's low upstream full-cycle costs will contribute to competitive returns on production at Fitch's natural gas base case price deck.

Using Fitch's production forecasts and EQT's current hedges, Fitch estimates the company has 65% and 27% of natural gas production hedged in 2015 and 2016, respectively. EQT primarily uses swaps to hedge production, with average values for swapped production of $4.00 and $4.14 in 2015 and 2016, respectively, providing meaningful cash flow protection at Fitch's base case price deck.

RECENT FINANCIAL PERFORMANCE

Fitch calculated debt/EBITDAX was 1.8x for the last 12 months ending March 31, 2015, which includes the effect of lower natural gas prices in the first quarter. Upstream metrics, which exclude debt at EQM, are strong for the category. As of year-end 2014, Debt/1P was $1.7/boe with debt/flowing of $13,700, which compare favorably with metrics of investment grade E&P peers. EQT's upstream metrics have been improving over the last few years, driven by strong production and reserve growth.

REASONABLE METRICS IN FORECAST

On a consolidated basis, Fitch expects that debt/EBITDA will remain around 2.0x in 2015, driven by higher natural gas production volumes and offset by lower gas price realizations and the addition of debt at EQT Midstream Partners, LP (EQM). Fitch expects EQM to add leverage as the company grows. However, Fitch takes the differences in the volatility of cash flows at EQT and EQM (commodity vs fixed-fee) into account when considering the credit implications of consolidated leverage metrics.

Fitch expects EQT to remain free cash flow (FCF) negative over the next several years, driven by funding of midstream projects at EQM, upstream capex funding production growth, and the effects of Fitch's natural gas price deck ($3.0/mcf and $3.25/mcf in 2015 and 2016, respectively). However, Fitch expects consolidated leverage metrics to improve in out years as production ramps up at EQT and EQM's midstream growth projects are funded and begin to contribute to EBITDA.

STRONG LIQUIDITY POSITION

As of March 31, 2015, EQT had $1.7 billion of cash on the consolidated balance sheet, which includes $150 million held at EQM. In addition, EQT had full availability on its $1.5 billion revolver. EQT's near-term maturities are manageable, consisting of $150 million due October 2015.

Financial flexibility should remain strong. Substantially all of EQT's acreage is held in-fee or by production, and the company has the ability to adjust upstream spending levels to optimize economics in response to spot and forward gas prices. EQM also has a $750 million revolver in place to fund organic growth spending and dropdowns from EQT.

EQM SUPPORTS UPSTREAM GROWTH

Fitch expects that funding of large scale midstream projects will take place primarily at EQM, or on essentially credit neutral terms for EQT. This relieves midstream funding pressures on EQT while also creating opportunities to move gas out of the basin, which should help to alleviate issues around negative basis differentials. EQT will focus the majority of capital spending on its Marcellus drilling program, where increased production volumes will benefit both EQT and EQM. Fitch expects that the May 12, 2015 IPO of EQM's General Partner EQGP will not materially influence the ratings of EQT, though on balance it is favorable for EQT from a credit perspective.

KEY ASSUMPTIONS: BASE CASE FORECAST

--Production growth of 23% in 2015 on announced production capex of $1.7 billion.

--Modest BTU uplift for natural gas quality and rejected ethane is offset by negative basis in 2015. Geographic differentials tighten in out years.

--EQM continues to fund near-term organic growth and asset dropdowns with primarily equity, switching to more debt in out years at the asset base grows.

RATING SENSITIVITIES

Positive: Future developments that may lead to positive rating actions include:

--Increased geographic diversification and a more balanced oil/gas production mix;

--Increased production volumes, with a continuation of reasonable funding policies for upstream production growth.

Due to the EQT's single-basin exposure and high exposure to natural gas, Fitch expects that potential positive rating actions could be driven by the establishment of a dominant position in the Marcellus shale (e.g. production of above 500 mboe/day), or, more likely, the establishment of a meaningful position in another core basin. Increased Oil/NGL volumes from a new basin would be a positive from a cash flow diversification perspective.

Negative: Future developments that could lead to negative rating action include:

--A significant and prolonged drop in natural gas prices without an appropriate adjustment to capital spending;

--Aggressive funding of negative FCF leading to leverage exceeding 2.25x to 2.5x for a sustained period.

Fitch has taken the following rating actions:

EQT Corporation

--Long Term Issuer Default Rating (IDR) affirmed at 'BBB-';

--Senior unsecured notes affirmed at 'BBB-';

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria & Related Research:

--'U.S. LNG: Dimming Prospects? (Low Oil Prices, Supply/Demand Profile, Asian LNG Pricing Introduce Outlook Uncertainty) (May 7, 2015);

--'High-Yield E&P Stress Test (Examining Exposure to the Downturn)' (April 20, 2015);

--'Full Cycle Costs Drop for North American E&Ps (Efficiency Gains Show Up in 2014 Numbers)' (March 24, 2015);

--'Fitch Oil and Gas Assumptions Summary' (Feb. 11, 2015);

--'Production Sharing Contracts; Countercyclicality Supports Debt in a Low Oil Price Environment' (Jan. 28, 2015);

--'E&P Borrowing Base Redeterminations: History Suggests Lenders May Go Easy in a Downturn' (Dec. 5, 2014);

--'North American Energy Outlook and LNG' (July 16, 2014);

--'North American Exploration and Production Handbook' (July 16, 2014);

--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).;

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

North American Exploration and Production Handbook

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749557

North American Energy Outlook and LNG

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751784

Production Sharing Contracts (Countercylicality Shines in a Low Oil Price Environment)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=857828

Fitch Oil and Gas Assumptions Summary Feb 2015

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862009

Full Cycle Costs Drop for North American E&Ps (Efficiency Gains Show Up in 2014 Numbers)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863880

High-Yield E&P Stress Test (Examining Exposure to the Downturn)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864216

U.S. LNG: Dimming Prospects? (Low Oil Prices, Supply/Demand Profile, Asian LNG Pricing Introduce Outlook Uncertainty)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865306

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984535

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