U.S. Gas Giant Downgraded To Junk Status




The largest natural gas driller in the United States just announced a massive write-down for its assets, offering more evidence that the shale sector faces fundamental problems with profitability.

In a regulatory filing on Monday, Pittsburgh-based EQT took a $1.8 billion impairment for the fourth quarter, as the natural gas market continues to sour. EQT said that the write down comes as a result of the "changes to our development strategy and renewed focus on a refined core operating footprint," which is a jargon-y way of saying that some of its assets are now worth much less.

EQT also slashed spending for 2020 to between $1.25 and $1.35 billion, down by another $50 million compared to the guidance the company provided in the third quarter of last year.

Although not a household name, EQT is the largest gas producer in the country, and is a giant in the Marcellus shale. EQT purchased Rice Energy in 2017, growing into a huge gas producer and pipeline company, but it has posted disappointing results in the last few years. The poor performance led to an internal battle for control of the company. Toby Rice, who co-founded Rice Energy and maintained small ownership stakes in EQT after the tie up, wrestled control from management, convincing the company's board that he could right the ship. He became CEO last year.

So far, the company's problems continue. Natural gas prices slid sharply in 2019, and are at rock-bottom levels, particularly for the time of year. According to the FT, while Henry Hub natural gas prices for February delivery trade at $2.24/MMBtu, they are only trading at around $1.83/MMBtu at the Dominion South hub in Pennsylvania.

EQT itself admits that it can't succeed in this environment. "Gas prices are down. It has a big impact, the difference between $2.75 gas and $2.50 gas," Toby Rice said in December "A lot of this development doesn't work as well at $2.50 gas."

EQT hopes to cut $1.5 billion in debt by selling assets and boosting cash flow. However, the cash flow part will be hard to pull off with prices stuck in the doldrums.

Moody's cut EQT's credit rating on Monday to Ba1 with a negative outlook, moving it into junk territory after the gas giant said it would issue new bonds to refinance debt. "EQT's significantly weakening cash flow metrics in light of the persistent weak natural gas price environment and the company's intent to refinance its 2020 maturities in lieu of debt reduction through repayment drives the ratings downgrade," Moody's senior analyst Sreedhar Kona said.

The agency also noted the "volatility associated with the cash flow of pure-play natural gas producers necessitate a higher retained cash flow to debt ratio threshold than EQT can deliver over the medium term even with significant debt reduction."

"Additionally, EQT's cash flow metrics compare poorly to other Baa3 rated oil producing companies, despite EQT's size and scale," Moody's concluded.

EQT's share price is down by more than half since last spring, and it is also down by more than 75 percent since 2017.

These problems are obviously much larger than EQT. Range Resources recently slashed its dividend in order to pay off debt, while also taking out another $550 million in new debt in order to pay off maturing debt this year. Meanwhile, Chesapeake Energy, the second largest gas producer, is now trading at pennies on the dollar and faces the prospect of being delisted from the New York Stock Exchange.

EQT's predicament reflects the broader financial questions that have long plagued the shale industry. Fracking can produce lots of oil and gas, but steep decline rates make profits elusive. If the largest gas producer in the country is struggling, and has a credit rating in junk territory, then something is wrong with the business model.

The problems endemic to the shale gas industry are starting to affect production. The decade-long boom in gas production from Appalachia may have finally come to a halt.

By Nick Cunningham of Oilprice.com

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