Balanced View on EQT Corporation - Analyst Blog

We have maintained our Neutral recommendation on EQT Corporation EQT on May 14, 2014. The company carries a Zacks Rank #2 (Buy).

Why Maintained?

EQT is a low-cost producer with a strategic midstream presence. The company's superior cost structure and above-average growth are expected to ease concerns related to rising natural gas prices. With an increasing reserve structure and higher number of projected Marcellus wells to be drilled in the coming five years, we believe that the company exhibits industry-leading organic growth momentum.

We expect EQT to exceed its 2014 guidance, aided by the low-risk and high-growth drilling locations in the Marcellus Shale. The Marcellus is expected to remain EQT's esteemed asset and a potential Upper Devonian will likely complement the company's growth. With EQT planning to suspend further drilling in Utica in 2014, the capex allocated for Utica will be directed toward drilling 8 additional Marcellus wells and 13 Upper Devonian wells in 2014. This is likely to provide ample liquidity to fund growth, Marcellus exploration, drive earnings visibility and keep the capex unchanged for the year.

EQT Midstream Partners, L.P. – a master limited partnership MLP of EQT – completed its initial public offering IPO in Jul 2012, garnering $232 million. EQT retains 57.4% limited partner interest in the MLP and 2% general partner interest. The formation of the MLP has benefited EQT as it has been able to transfer lower yielding midstream assets, maintain control over distribution, speed up acreage development and reallocate the capital at EQT to produce higher returns. Thus, the MLP would indirectly act as a funding vehicle for EQT.

We remain optimistic about EQT's strategy of divesting the expensive yet less profitable assets and concentrating on cost-effective and lucrative investment opportunities. The company's continued exploration of options for further drilling activities also bode well. Moreover, EQT's capital efficiency level looks impressive.

However, the company lacks a geographically diversified asset base, as its resources are concentrated in the Appalachian Basin. Any disruptions in the region will adversely affect results.

Stocks That Warrant a Look

While we expect EQT to perform in line with its peers, stocks like Encana Corp ECA, CVR Refining, LP CVRR and Matrix Service Company MTRX are attractive picks in the near term. All of these sport a Zacks Rank #1 (Strong Buy).