Fitch Ratings has assigned a 'BBB-'/'RR4' rating to
Proceeds are intended to partially finance the acquisition of
The rating reflects EQT's debt reduction efforts, strong FCF generation, enhanced liquidity, large production scale, high quality inventory, and improved overall operating costs per unit. This is offset by reduced hedging exposure, and exposure to basis differentials, which grow large in some periods.
The Stable Outlook reflects Fitch's expectation of material debt reduction, improved leverage, and continued reductions in operating costs.
Key Rating Drivers
Tug Hill Acquisition: EQT announced that it has entered into an agreement to acquire
Fitch views the transaction as a modest positive given the greater production scale, higher liquids cut, low cost structure, midstream diversification and ability to link to EQT's assets, and leverage neutral financing. Fitch views the transaction as more expensive than EQT's other more recent transactions in terms of price to production and acreage given the rise in natural gas prices. The short-date maturities of the proposed debt offerings reflect EQT's desire to use FCF to quickly repay debt associated with the transaction.
Debt Reduction Management: Pro forma for the transaction, EQT plans to reduce debt by
Strong FCF Generation: Fitch expects EQT to generate material FCF over the forecasted horizon based on Fitch's base case price deck and Strip pricing scenarios. FCF will be driven by increased scale following its recent and pending acquisitions, lower operating costs per unit, a lower decline rate that allows for more efficient capital spending, and improved realized pricing. EQT has reduced its hedging program, which is beneficial in the near term in a stronger natural gas pricing environment, but could pose some risk if natural gas prices were to materially decline. Fitch believes the company's overall debt reduction and improvement in operating costs offsets the risk of lower prices on FCF.
Robust Liquidity: EQT's current liquidity is supported by a
Relatively High G&FT Costs: EQT's firm transportation (FT) and gathering and transmission costs are relatively high compared with other Appalachian natural gas producers. The company has taken steps to rationalize its firm transportation portfolio to improve costs while maintaining direct access to markets with greater realized prices and growing demand. Fitch expects these costs on a unit basis will continue to decline over the forecasted period from the company's increase in scale, pending midstream acquisition, and pending roll-off of midstream contracts.
Leading Size and Acreage: EQT is the largest gas producer in the
The company has one of the best land positions in the Marcellus, given its extensive contiguous acreage position, including 470,000 net core acres in the Southwest Pennsylvania Marcellus, 290,000 net core acres in the West Virginia Marcellus, and 180,000 net core acres in the Northeast Pennsylvania Marcellus, which are prior to the pending acquisition. EQT estimates it has 1,800 core undeveloped drilling locations, providing an inventory of more than 15 years of drilling at the current maintenance drilling pace. The acquisition adds an additional approximately 90,000 core net acres and approximately 300 core net locations.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
WTI oil price of
Organic production increases in the low single-digits over the forecasted horizon;
Annual Capex of
Stock repurchases of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Mid-cycle debt/EBITDA below 1.5x;
Improvement in Fitch-calculated netbacks, particularly from lower firm transportation and gas gathering costs per unit;
Increased diversification with continued credit-neutral funding policies.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Failure to meet debt reduction targets of
Change in financial policies including acquisitions, stock buybacks and/or dividends that result in deterioration of credit metrics;
Mid-cycle debt/EBITDA above 2.0x on a sustained basis;
Sustained erosion in natural gas fundamentals that leads to reduction in liquidity, complicating the capital structure, or operational adjustments resulting in a reduction of long-term production levels.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Liquidity: At
Pro forma for the acquisition and financing transaction, EQT's next material debt maturity is in 2024 for the proposed term loan. Fitch believes the company's expected generation of FCF under its base case commodity price deck should allow EQT to repay and refinance the maturity wall beginning in 2024.
Issuer Profile
EQT is the largest natural gas E&P company in the
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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