EQT targets 200 wells for Pennsylvania and West Virginia
EQT Corporation (ticker: EQT) announced fourth quarter earnings yesterday, reporting a net loss of $192 million, or ($1.11) per share. After adjusting for impairments and other items affecting comparability, earnings were $43.8 million, or an income of $0.25 per share. With a Zacks Consensus Estimate of a loss of $0.10 per share, the adjusted earnings beat estimates by a wide margin. Total 2016 net loss was $453 million, or ($2.71) per share, with adjusted net loss of $54.3 million, $0.33 per share.
EQT Reserves grow to 13.5 Tcfe, up 35%
EQT also reported reserves yesterday, with year-end 2016 proved reserves of 13.5 Tcfe, a 35% increase over 2015. Excluding 2016 acquisitions, the company added 1.9 Tcfe of proved reserves in 2016. This increase was the result of the completion of 143 wells and the acquisition of 75 wells during 2016.
Proved undeveloped reserves grew to 6.7 Tcfe, an increase of 80% above last year’s 3.7 Tcfe. Much of this increase was due to the acquisition of Marcellus acreage; EQT added a net 145,500 Marcellus acres in 2016.
Source: EQT October 2016 Investor Presentation
200 wells for Pennsylvania and West Virginia
EQT expects 2017 CapEx to be $1.5 billion, with $1.3 billion for well development. The company plans to drill 119 wells in the Marcellus, focusing on core acreage in Pennsylvania and West Virginia. An additional 81 wells are planned for the Upper Devonian in Pennsylvania. While most development is expected to be in the Marcellus and Upper Devonian, the company expects to spud 7 Utica test wells in 2017.
Steven T. Schlotterbeck, EQT President, discussed some operations improvements made recently. Along with larger and more intensive fracturing jobs, the company has created a model that it believes will improve logistics significantly. This model, which outlines things like rig and frac scheduling, is intended to help avoid downtime and use capital efficiently.
Q&A from EQT conference call
Q: Can you talk a little bit more on the innovations side of things, where can you go from here, obviously longer laterals, proppant loading, stage facing, where you think you could go from where we’re at today?
EQT President Steven T. Schlotterbeck: Well, I think on the completion side, as we mentioned before, we’ve started doing bigger frac jobs and higher proppant loadings. We’re not quite ready to announce any revisions to our type curves, but I would expect it will, we’ll have an update by the next call. We just want to get a little more data there, and we’re expanding that to – we’re now testing even higher proppant loads that will take some more time to conclude how much or if, there is a benefit there, but we continue to experiment and look for better ways on the completion side.
I would say our innovations aren’t solely focused on drilling completion activities though, and a couple areas we’re doing a lot of work in are kind of more on the logistical side. So, we’re doing a lot of operations research kind of work on our rig scheduling and our frac scheduling and how we move and transport water. And what we’re finding through some pretty advanced modeling is our previous assumptions about what was optimum turn out to be pretty far off.
And the conclusions from these models really aren’t intuitive. Very difficult for a human being to look at a spreadsheet and come up with the optimum schedule. So we’re just starting that kind of work. We think the applicability to our business could be pretty widespread and potentially pretty dramatic in terms of lowering our unit operating costs. So a lot of work happening in that area. It’ll take some time, but we’re pretty excited about it.
Q: Can you give us an example of what you mean by that, just some of the logistical things? Maybe just one salient example just to give us some construct of what you all are doing and seeing?
Steven T. Schlotterbeck: So one example we did is we brought in a PhD from Carnegie Mellon University to help us with this modeling because it’s pretty advanced stuff for certainly for someone like me. And first thing he did was he did a look-back on a group of pads in Greene County that we had already drilled. So we knew what we had thought was optimum.
And our typical assumption was generally if we have multi-well pads, drill all the wells with the rig. It’s very expensive to move rigs. It’s about $0.5 million every time we move a rig. So we thought it was best to drill all the wells, move the rig somewhere else, bring in the frac crews, bring in the water and the sand, and frac all the wells back-to-back and then bring them all online.
And he looked back and built this model which incorporated the logistics of the water, logistics of the crews, the downtime associated with the production, the pipeline capacities and capacity availability, a number of other variables. And the rig schedule that it printed out looked like a pig’s breakfast. I mean, it was moving rigs a lot more often than we thought. But said that we would have created significantly more value had we followed that schedule. So that really opened our eyes. And we really thought, well, this might really add some value if we get these kind of results everywhere else.
So we’re starting to apply that, again, to rig and frac scheduling, but also to helping us decide how to better design our pipeline systems to make that capital more efficient and, importantly, the best ways to move our water, because that’s becoming a bigger and bigger piece of our cost structure.
Analyst Commentary
From KLR Group:
We are decreasing our EQT target price $3 to $94 per share due to higher operating/overhead expense partly offset by higher NGL price realizations. Our composite weighted average cost-of-capital values the midstream business at ~12x next year’s cash generation (EQT GP Holdings (EQGP, $27.78, NR)/EQT Midstream Partners (EQM, $80.12, NR) valuation). Our ’17 production estimate of ~830 Bcfe is at the high end of company guidance (810-830 Bcfe).
Lesser gas producer capital yield (cash recycle ratio)
As a consequence of the company’s elevated capital intensity, EQT’s mid-cycle capital yield of ~135% is below the gas-dominate peer median cash recycle ratio of ~150%.
Marcellus half-cycle returns exceed Upper Devonian/Utica
In ’17, EQT plans to conduct a four to five-rig program (excludes top hole rigs) and drill 119 core Pennsylvania/West Virginia wells (~7,000’ laterals) comprising 76 wells in Pennsylvania and 43 wells in West Virginia. All wells are on multi-well pads. Core Marcellus wells (~7,000’ laterals, ~40 frac stages) should recover ~14 Bcfe (~2.1 Bcf/1,000’ lateral) for a cost of ~$5.75 million. Next year, the company expects Marcellus lateral lengths to average at least 8,000’.
Increasing Upper Devonian development
EQT has ~85,000 net core acres prospective in the Upper Devonian in Greene, Washington and Allegheny Counties, Pennsylvania overlying the Marcellus. In ’17, the company plans to conduct a two to three-rig program and drill 81 Upper Devonian wells (~7,300’ laterals) on existing Marcellus pads. Upper Devonian wells (~7,300’ laterals) should recover 10-11 Bcfe (~1.5 Bcfe/1,000’ lateral) for a cost of ~$5.75 million.
Deep Utica well performance using ceramic proppant imply potential for 3-3.5 Bcf recoveries per 1,000’ of lateral
In ’17, the company plans to conduct a one-rig Utica program and drill seven wells (~6,800’ laterals). In Greene County, Pennsylvania, the company’s initial deep Utica test, the Scotts Run, (~3,200’ lateral, ceramic proppant) has produced almost 10 Bcfe the first year and should recover ~20 Bcf (~6 Bcf/1,000’ lateral). Reverting to ceramic proppant, the Shipman (~7,000’ lateral) and the West Run (~5,200’ lateral) should recover at or above 3 Bcf/1,000’ of lateral.
Assuming pressure managed production of 15-20 Mmcfpd the first year, deep Utica wells (~5,400’ lateral, ceramic proppant) should recover 15-20 Bcf (3-3.5 Bcf/1,000’ lateral) for a targeted well cost of $12-$13 million.
From Wells Fargo
• Summary-- Positive. Production above with better pricing drove solid quarter, while reserves were up 35% y/y. No surprises otherwise as production guidance unchanged, with $0.10 improvement in differentials expected in 2017. Gas macro driving gas group near term, though would expect slight positive to EQT shares on update.
• 2017 Production/Capex Unchanged. 2017 guidance unchanged with 810-830 billion cubic feet equivalent (Bcfe) of production on a $1.5 billion capital budget and plans to drill 119 Marcellus (76 PA, 43 WV), 81 Upper Devonian wells (all to be co-developed with Marcellus), as well as 7 Deep Utica wells.
• Operations: In the Marcellus, EQT spud 97 wells, ending the quarter with 1,046 total wells spud and 875 flowing, up 59 or 7% sequentially. Company had 150 wells drilled but uncompleted and 21 complete but not online as of YE2016.
• 2016 Reserves Up 35%. 2016 proved reserves of 13.5 trillion cubic feet equivalent (Tcfe), up 35% from YE2015. Proved undeveloped reserves (PUD) percentage at 50%, vs. 37% in 2015 due to the acquisition of core Marcellus acreage while partially offset by the conversion of 647 Tcfe of PUDs to proved developed reserves. Excluding the impact of acquisitions, EQT added 1.9 Tcfe of proved reserves in total (net of 473 Bcfe in downward revisions), which was 246% of EQT's 2016 total production, while reserve additions via acquisition totaled 2.4 Tcfe. Majority of PUDs (97%) in the Marcellus.
• EPS/Production Above. Adjusted Q4 EPS of $0.25 was above our -$0.03 and Street's -$0.06. Variance versus us driven by 2% higher production and higher realized prices which more than offset lower midstream operating income. Production of 198.4 Bcfe was 2% above our 193.6 Bcfe estimate, 2% above Street's 194.5 Bcfe. Marcellus at 173.7 Bcfe in line with our 173.0 Bcfe. LOE, G&A and DD&A came in above us. EQT Midstream operating income of $134.6MM was below our $142.8MM on lower gathering revenues, offset in part by higher Transmission revenues.
