The Rating Outlook is Stable. Approximately
KEY RATINGS DRIVERS
The 'BBB-' rating is supported by EQT's healthy credit metrics, which include reduced leverage ratios, strong financial performance, good asset quality and operating metrics in the upstream business, including a low-cost legacy acreage position in the
Significant production growth particularly from the Marcellus has enabled EQT to produce natural gas at low costs. Sales volumes in the Marcellus grew 50% in the first quarter of 2014 (1Q'14) over the prior year period, and total volumes have grown by 30%, rising to over 1.1 Bcfe per day in the latest quarter. Marcellus sales volumes accounted for approximately 78% of EQT total 1Q'14 volumes. In 2014, EQT expects sales volumes to increase in the range of 23% to 27%. At year-end 2014, reserves were 8.3 Tcfe, up 2.3 Tcfe from the prior year.
The midstream business primarily serves EQT production and has therefore seen significant volume increases as well. During 2013, EQT accounted for approximately 70% of midstream revenues. Third-party volumes have been increasing in the midstream segment which should slightly decrease its reliance on EQT production volumes.
Ratings concerns include the shifting business risk profile as EQT transitions closer to a pure-play E&P through the combination of strong growth in the E&P segment and ongoing dropdowns of regulated assets to its master limited partnership (MLP), EQM - EQT Midstream Partners, LP (EQM; not rated). Upstream operations accounted for approximately 71% of latest 12 months (LTM) EBITDA at
Leverage: As EQT has grown its upstream operations, which are viewed as more volatile from a credit perspective, it has reduced its financial risk by lowering leverage. At the end of 1Q'14, EQT's leverage was 1.8x. Between 2008 and 2012, its year end leverage ranged from a high of 3.4x and a low of 2.6x. Fitch expects leverage to be in the range of 1.75x- 2.0x at the end of 2014. Natural gas prices and capex spending are the primary variables expected to impact leverage.
Liquidity: The company continues to maintain adequate liquidity for its funding requirements. As of
EQT funded a portion of its 2014 liquidity needs with the dropdown of the Jupiter Gathering System into its MLP which closed in early
Other significant midstream assets reside at EQT and Fitch expects that more assets may be dropped into the MLP and provide EQT with additional cash proceeds in the coming years.
Prior to the closing of the Jupiter transaction, EQT held 42.6% of EQM's limited partnership units and the 2% general partnership interest.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Positive rating action is not viewed as likely; however, a significant reduction in leverage or a shift away from expanding upstream operations could prompt changes.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--A significant and prolonged drop in natural gas prices without an appropriate adjustment to spending;
--Increased drilling activity and expenditures in a period of low commodity prices that lead to weaker credit metrics;
--Leverage which exceeds the 2.25x to 2.5x range for a sustained period while upstream operations remain the company's focus.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology: Including Short-term Ratings and Parent and Subsidiary Linkage'
--'Rating Pipelines, Midstream and MLPs: Sector Credit Factors'
--'Pipelines, Midstream, and MLP Stats Quarterly - Fourth-Quarter 2013'
--'2014 Outlook: Midstream Services'
--'Investor FAQs: Recent Questions on the Pipeline Midstream and MLP Sectors'
--'Marcellus Shale Report: Midstream and Pipeline Sector Challenges and Opportunities'
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Pipelines, Midstream and MLPs -- Sector Credit Factors
Pipelines, Midstream, and MLP Stats Quarterly -- Fourth-Quarter 2013
2014 Outlook: Midstream Services
Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors
Marcellus Shale Report: Midstream and Pipeline Sector -- Challenges/Opportunities
Source: Fitch Ratings
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