(By Balaseshan) Deutsche Bank analyst Stephen Richardson upgraded his rating on shares of EQT Corp. (NYSE:EQT) to "Buy" from "Hold" while introducing its $59 price target, saying natural gas fundamentals are improving.
Richardson said a high quality asset base (current Marcellus program still generates a 25% IRR at $3.00/mmbtu prices), solid balance sheet (31% debt to cap) and go forward development plan all position EQT to win.
Unlike financially levered or higher cost peers, modest increases in deferred natural gas prices hold significant promise for EQT's asset base. The key to value recognition is via acceleration of development, and with a funding strategy secured and the outlook for the commodity improving, the analyst looks for the equity to reflect more of this potential outcome.
Unlike peers where $4/mmbtu+ natural gas prices will be required to justify a return to drilling and stem underlying declines, EQT is growing production about 30% this year despite low prices.
A prolific resource, with a low royalty burden, and held by production means EQT needs a more modest pricing increase than peers before Richardson expects revisions to the operating plan. Small changes in near-term natural gas prices will have important implications for cash flow and hence drilling plans.
EQT enjoys a defined funding strategy, an asset based that is de-risked, and a management team that understands the path to value recognition is via acceleration. Every 2 rig increase to the analyst's Marcellus development program (10 rigs today) increases his net asset value by about $2.00/share and he expects management to stick to a drilling budget, which is organic cash flow plus additional cash (ex-debt) approach.
Although EQT does drill liquids-rich wells in the Southwest of the Marcellus, this drilling accounts for less of its total program relative to peers (10% vs. 15% at RRC). Despite being a boost to wellhead profitability, NGLs can also be a logistical challenge for Marcellus producers, in Richardson's view.
Further, returns in the most prolific dry gas areas (9 Bcf EURs) are comparable to those in liquids prone areas, balancing the portfolio. The analyst sees the funding and development plan as well insulated from a potential oversupply of liquids in 2012/13.
The brokerage maintained its 2012 EPS estimate for the integrated energy company of $1.81 and its 2013 estimate of $2.98.
EQT is trading down 0.49% at $50.50 on Thursday.