EQT Corporation and Appalachian Gas

Includes: CHK, COG, EQT, RRC
by: Bruce Vanderveen

In 1859, just before the Civil War broke out, Edwin Drake, near Titusville, Pennsylvania, drilled the world’s first commercially successful oil well. Soon, several hastily thrown together companies were drilling all over western Pennsylvania. Some of the wells on hitting pressurized pockets, spewed spectacular gushers of oil, equipment and sometimes even men up into the air. Pollution was not a consideration in the last decades of the 19th century.

Then, in 1878, while drilling for oil east of Pittsburgh, Michael and Obadiah Haymaker struck commercial quantities of natural gas. Obadiah was later shot dead defending his property. Out of these rough origins the Equitable Gas company was formed in 1888. Rapidly growing industries in nearby Pittsburgh provided a ready market. Equitable Gas grew over the years and was renamed Equitable Resources in 1984. The company name was changed to EQT Corporation (NYSE:EQT) in February 2009.

EQT is now an integrated energy company, one of the largest in the Appalachian area, with growing reserves and some 10,450 miles of gathering lines. The company operates in Pennsylvania, West Virginia, eastern Kentucky, and southwestern Virginia. 2007 revenues were $1.58 billion. EQT operates in two segments, Equitable Supply and Equitable Utilities. The supply segment develops, produces, and sells natural gas, crude oil, and natural gas liquids while the utility segment distributes natural gas to some 270,000 residential and 18,600 commercial and industrial customers.

Natural gas is produced from trapped gas in shale and coal beds in the Appalachian area. EQT anticipates significant growth in gas production from its Devonian age shale (ocean sediments laid down some 400 million years ago, now at depths of 2,500 to 7,500 feet in the area). Devonian shale underlies much of the northern Appalachian area. Especially promising is the deep lying Marcellus shale beds.

EQT’s current capitalization is around $4.1 billion, the stock price, at 31, is down considerably from the 52 week high of 76. EQT, with its utility component, may provide some buffering from the price volatility of natural gas. The dividend is 2.9% and seems to be well covered. The website www.eqt.com talkes about the Marcellus shale promise, has a section on investor information and will give you a link to recent annual reports.

EQT is increasingly using new technology, such as horizontal drilling, to develop reserves. In the 2007 annual report they say “At year end, proved reserves increased by 7% to 2.7 Tcfe.”. The company, as they explore the high pressure, deeper Marcellus shale, anticipates even greater growth of reserves and production in 2008. Cabot Oil (NYSE:COG), Chesapeake Energy (NYSE:CHK) and Range Resources (NYSE:RRC) also drill the Marcellus shale with its exciting potential.

Natural gas is currently priced just over $4 per 1000 cubic feet, well down from its high over $12 in late June, 2008. At these prices, not unexpectedly, exploration and drilling is slowing dramatically. EQT, like Chesapeake, XTO and many others have found abundant reserves in the US shale. The cost of tapping these reserves continues to drop and promises a greatly expanded use of natural gas here in the US.

A few years ago, the thinking was the US needed large LNG ports to import natural gas for our needs. Thanks to domestic discoveries the last few years using new technology, such as horizontal drilling, that is no longer the case. The US can achieve energy independence in gas if not oil.

Disclosures: No positions

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