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 $2.3 billion in debt, excluding debt at EQT Midstream Partners, LP EQM is affected by this rating action. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

EQT's ratings are supported by the company's low-cost position in the Marcellus Shale, reasonable credit metrics particularly given commodity price weakness, equity funding of recent acquisitions, and an ample liquidity position at March 31, 2016. Increasing Marcellus takeaway and logistics options and low operating cost profile provide EQT with profitable gas production opportunities even in a lower natural gas price environment.

Low-Cost Upstream Operations

EQT is well positioned with a significant position in the prolific Marcellus shale. Pro forma for the announced acquisition from Statoil, EQT has 7.8 Tcfe in proved reserves and 660,000 acres in the Marcellus shale, which has been the fastest growing U.S. natural gas play over the last five years. On a more prospective basis, the company also has 450,000 acres in the Utica, with 3,400 potential drilling locations. The company is currently drilling several Utica test wells in order to evaluate their position.

The company's Marcellus assets have low drilling/operating costs relative to the amount of gas produced, leading to low unit costs and decent economics even in a lower price environment. While gas realizations within the play have seen negative geographic differentials in recent periods due to local oversupply conditions, midstream companies are continuing to build out infrastructure to support current and future Marcellus development. This should help to tighten up differentials in future periods as the play matures, supporting longer-term development of the resource.

The company's status as effectively a one-basin company with limited oil/gas diversification could be a limiting factor for near-term rating upgrades. However, the low costs and superior economics of the Marcellus make it among the best to be focused in.

Continued Production Growth

EQT produced 1.7 Bcfe/day in 2015, and has increased production volumes on a 35% CAGR since 2010. While an upstream, natural gas-weighted focus poses unique risks to the credit, EQT has taken several steps to mitigate these risks, including issuance of EQT equity, hedging of natural gas volumes, maintenance of adequate liquidity, and conservative funding of growth at the MLP subsidiary EQM. Fitch views EQT management as more conservative than many upstream peers with regard to financing growth and maintaining liquidity.

Consistent Hedge Policy and Implementation

Based on Fitch's production forecasts, EQT currently has approximately 50% and 30% of natural gas volumes hedged in 2016 and 2017, respectively. Respective weighted average hedge prices are $3.6/mcf and $3.3/mcf for 2016 and 2017. Approximately 90% of EQT production is natural gas, and the company does not hedge oil or natural gas liquids (NGL) volumes. With current EQT hedges applied to Fitch's base case price deck, Fitch estimates cash flow uplift of $440 million and $163 million in 2016 and 2017, respectively. The company also has 96 Bcf of 2018 production hedged at an average price of approximately $3.0/mcf. Fitch expects the company to continue to layer on hedges opportunistically in the event of upward moves in the forward curve.

Good Credit Metrics for Category

Upstream metrics are strong for the category. At Dec. 31, 2015, debt/1P was $1.9/boe with debt/flowing of $10,900, which are competitive with metrics of investment-grade E&P peers. On a consolidated basis, Fitch expects that EQT gross debt/EBITDA will increase to approximately 3.0x in 2016 due to the effect of lower natural gas prices, but fall to 2.8x and 2.7x in 2017 and 2018, respectively.

STRONG LIQUIDITY POSITION

Fitch views EQT's liquidity position as strong relative to peers. Liquidity was $3.1 billion as of March 31, consisting of $1.6 billion in cash and $1.5 billion available on the EQT credit facility. Financial flexibility should remain adequate despite relatively low natural gas prices and basis differentials. 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 has a $750 million revolver in place to fund midstream growth spending and asset dropdowns from EQT.

Funding of Significant Midstream Projects at EQM

Funding of multi-billion dollar midstream projects, including Mountain Valley Pipeline (MVP), will take place at EQM. This relieves midstream funding pressures on EQT while also creating opportunities to move gas out of the basin, which should help alleviate issues around negative basis. Fitch expects that EQT will focus the majority of its reduced capital spending on its Marcellus drilling program, which will benefit both EQT and EQM. In 2015, 97% of EQM's gathering revenues came from EQT, while 48% of transmission and storage revenues were linked to EQT.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for EQT include;

--Production growth of approximately 20% in 2016 on announced production capex of $1 billion;

--Geographic differentials tighten moderately in out years;

--Current hedge positions are incorporated into cash flow forecasts;

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

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

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

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

Fitch expects that potential positive rating actions would be tied to the further establishment of a dominant position in the Marcellus shale, or the establishment of a meaningful position in another core basin. Increased Oil and NGL volumes from a new basin would be positive from a commodity diversification perspective.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Mid-cycle E&P debt/EBITDA projections above 2.75x to 3.0x;

--Material amounts of negative free cash flow or opportunistic leveraging acquisitions funded with increases in EQT gross debt.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

EQT Corporation

--Long Term IDR at 'BBB-';

--Senior unsecured notes at 'BBB-'.

Summary of Financial Statement Adjustments: Fitch has made no material adjustments that are not disclosed within the company's public filings

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004407

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004407

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