|Shares Out. (in M):||131||P/E||32.5x||19.5x|
|Market Cap (in $M):||5,750||P/FCF||9.7x||8.3x|
|Net Debt (in $M):||2,000||EBIT||0||0|
I recommended EQT Corporation last March (the shares were at $33.06). Since then, the company's very large position in natural gas shale formations has become even more valuable and promising. As a result, we are re-recommending the shares.
For purpose of analysis and valuation, EQT's assets can be broken down into six segments: (1) an estimated 2.2 TCFE of proved developed gas reserves; (2) 400,000 acres in the high pressure Marcellus gas shale trend; (3) 2,200,000 acres in the Huron and Borea gas shale trends; (4) other acreage; (5) mid-stream gathering and pipeline facilities; and (6) a gas distribution company that serves 270,000 customers in Pennsylvania, West Virginia, and Kentucky.
I estimate that EQT's proved developed reserves currently are about 2.2 TCFE. While the reserves are long-lived (close to 20 years), they have a high BTU content and are close to market. On balance, I value the proved developed reserves at $2.50 per MCF, or $5,500 million. (Note - I am giving no value to the proved undeveloped reserves).
EQT has an enviable position in the Marcellus trend, partially because much of its acreage is held in fee. Importantly, EQT controlled substantial acreage in Pennsylvania, West Virginia, and Kentucky for many years - long before gas shale formations became economic and popular. This is how the company established such a large and highly desirable position in gas shale plays at very favorable terms. We value EQT's high pressure Marcellus acreage as follows. Similar acreage has been "selling" for $2,500 per acre in recent quarters, but much of EQT's acreage is held in fee (and therefore is more valuable) and acreage prices remain depressed due to the after effects of the financial crisis and the low natural gas prices during most of 2009. At $3,500 per acre (our valuation) EQT's 400,000 high pressure Marcellus acres would be worth $1,400 million. I will check the reasonableness of this valuation using the following methodology. EQT expects to develop the Marcellus using 80 acre spacing. Therefore, there is a potential for about 5,000 wells. Recoverable reserves are averaging about 3.5 BCFE per well. Thus, the potential reserves of the Marcellus acreage is 17.5 TCFE. However, not all the acreage may be developable, for one reason or another. EQT estimates that its potential recoverable Marcellus reserves are 9.9 TCFE. Using EQT's 9.9 TCFE estimate, a valuation of $1,400 million for the acreage is equivalent to only about $.14 per MCF - which seems to be a very conservative estimate.
The Huron and Borea are two different formations lying on top of each other. Spacing is one well per 80 acres for the Huron and also one well per 80 acres for the Borea. Thus, on 2,200,000 acres, there is the theoretical potential for 55,000 wells (half Huron and half Borea). Reserves per well are about 1 BCFE (note - drilling and completion costs only are about $1 million, so the economics are very favorable). New drilling techniques have the promise of increasing reserves to materially more than 1 BCFE per well, but I will use the 1 BCFE estimate. Therefore, the total potential of the Huron and Borea is as much as 55 TCFE. EQT, based on year-end 2008 technology, projected the recoverable Huron and Borea potential at only 13.1 TCFE. Technology is improving rapidly - and it seems reasonable that the potential will far exceed 13.1 TCFE. We value the Huron/Borea acreage as follows. Each Huron/Borea acre contains at least 2 BCFE of reserves, or 57% as much as a Marcellus acre. The economics of the three shales are similar. If we value Huron/Borea at 57% of Marcellus' per acre value, then the Huron/Borea would be worth about $2,000 per acre, or $4,400 million.
EQT owns about 800,000 additional acres, including 300,000 acres in the low pressure Marcellus shale. We guess that these 800,000 acres are worth a minimum of $200 million.
EQT has substantial mid-steam assets (gathering, intra-state pipelines, and the well positioned Equitrans inter-state pipeline) that have a book value of about $1,650 million. Because of intra-company transfers, the mid-steam's reported profits are arbitrary - and cannot be used as a method of valuation. Our guess is that the assets are worth something above their book value - and our best guess is $1,750 million.
EQT's distribution subsidiary has fixed assets of about $600 million. The subsidiary currently is earnings about $80 million (before allocated interest expense) pre-tax, or $50 million after taxes. My best guess is that the subsidiary is worth about book value, or $600 million.
Based on the above appraisals, we believe that EQT is worth about $88 per share:
Proved developed reserves $5,500 million
Marcellus acreage 1,400
Huron/Borea acreage 4,400
Other acreage 200
Mid-stream assets 1,750
Distribution assets 600
Plus net other assets 150
Less 50% of deferred taxes -450
Less net debt -2,000
Estimated value 11,550 ( = $88 per share on 131 million shares)
A few additional comments! At the end of 2008, EQT's potential recoverable reserves, totaled 25 TCFE (management's estimate). 25 TCFE is equivalent to 4.1 billion barrels of crude oil. To put this 4.1 billion barrels of crude in perspective, the Prudhoe Bay (North Slope) field in Alaska had about 25 billion barrels of oil reserves (plus natural gas that is yet to be commercial) - and that 25 billion barrels was shared by several companies. Furthermore, since EQT announced the 25 TCF estimate, the company has materially improved its technology and therefore the recoverability of its reserves. For example, until recently, EQT had been drilling Huron wells with 3,700 foot laterals. These wells typically had recoverable reserves of close to 1 BCFE each. Recently, the company has been drilling wells with 6,700 foot laterals that have recoverable reserves of 1.6-2.0 BCFE each. My conclusion is that EQT's gas shale position is World class.
EQT's recent fundamentals have been favorable. Last month, management announced that the company's 2010 gas production is expected to be up 20% vs. 2009.
All our research leads us to conclude the EQT's management is very competent and conservative.
The company has world class acreage in natural gas shale formations. We believe that this position likely will eventually be recognized in the price of EQT's shares. Exxon's recent annoucement that it intends to acquire XTO Energy, largely for its position in gas shale, might be a catalyst for such recognition.