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EQT Corporation: The Opportunity Cost Of Hedging

Dec. 02, 2021 7:24 AM ETEQT Corporation (EQT) Stock16 Comments


  • The company gained more exposure to the currently strong commodity pricing environment.
  • The brutal honesty of this management is a very rare and valuable trait.
  • The hedging accounting causes GAAP to distort income results as reported on the income statement. An opportunity cost gets lumped in with a financial loss or income.
  • The company is probably barely profitable without the effect of the hedges.
  • The absurdity of free cash flow is exposed by the lack of cash flow underlying the calculation.
  • This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Learn More »

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EQT (NYSE:EQT) recently announced that management unwound some hedges to raise the company exposure to the currently strong pricing. The CEO noted that obviously hedging against lower prices was not correct. Investors need more managements that

I analyze oil and gas companies like EQT and related companies in my service, Oil & Gas Value Research, where I look for undervalued names in the oil and gas space. I break down everything you need to know about these companies -- the balance sheet, competitive position and development prospects. This article is an example of what I do. But for Oil & Gas Value Research members, they get it first and they get analysis on some companies that is not published on the free site. Interested? Sign up here for a free two-week trial.

This article was written by

Long Player profile picture

Long Player believes oil and gas is a boom-bust, cyclical industry. It takes patience, and it certainly helps to have experience. He has been focusing on this industry for years. He is a retired CPA, and holds an MBA and MA.

He leads the investing group Oil & Gas Value Research. He looks for under-followed oil companies and out-of-favor midstream companies that offer compelling opportunities. The group includes an active chat room in which Oil & Gas investors discuss recent information and share ideas. Learn more.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of EQT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (16)

Is eqt structured as an mlp.
EQT management projects FCF per share of $2.56, $5.14, and $7.03 for 2021, 2022, and 2023 respectively. An announcement of its allocation will be made before the end of this year. For 2022, the FCF yield on the current stock price of $18.50 is 27.8%.
Hector_Torres profile picture
This says it all: " But the reality is that management never saw the challenges of 2020 ahead of time. So, it is probably reasonable to assume that management never saw the benefits of a strong fiscal year 2021 pricing on the horizon either"

If you're one of the largest producers and didn't realize that the market had become very tight in supply very early in 2021 (like almost every analysts saw) then you're obviously doing a bad job.

On the other hand if you have already hedged and the market rallies hard on you, well then you just keep the hedges even if the losses look bad on your income statement and cash flow. That's what they're for. But if you panic at the high of the markets (or vow to pressure from the press and vocal analysist) and buy back hedges (or call or buy any bullish structures) then you're just flipping your position at the highs and doubling down on your losses and lack of market strategy.

Either way there is no excuse for such a bad execution. If you screwed up by not lifting your hedges early enough then just keep them. And if the market runs up to $6.00 go ahead and produce a LOT more and hedge them at those levels where you suddenly make 50+% returns on any new production !!!
Before FAS 133 companies could qualify derivatives for hedge accounting. MTM G/L were carried on the balance sheet until closed out and not passed through the income statement. But the accounting world (and FASB?) has a great fear of derivatives. So qualifying for hedge accounting became increasingly difficult. Most managements understand the economic need to hedge risks like commodity prices, So they accept the MTM volatility even if they don't like it. Wall Street does an exceedingly bad job of explaining the MTM losses. If today's gas prices are flat through year end, 4q will show MTM gains as losses are reversed.

I am not as positive in EQT's reversal of its hedges unless it is in the context of a new hedging strategy policy. The danger- jumping in and out of hedges starts to look a lot like trading, not risk management.
Long Player profile picture
@sdkcat Very Very True and then few can do it successfully. AR and PEYUF would be two I can think off that are public companies
jsantmyer profile picture
@sdkcat I would think the company's hedging strategy is not one of jumping in and out trading but rather moves dictated by a statistical model pursuant to a risk management strategy. If not, they would be well advised to subcontract out that aspect of their business to a company that does it as a service.

The way I look at hedging is as an additional operating cost of production. In other words, risk management is just as much a part of the operational side of the business as are normal operating expenses. If one would try to survive in the business without hedging it would work great until it didn't. It is an operating cost that can not be avoided.

Thus implementing a sound statistical strategy and sticking to the plan is essential to provide sound risk management to the company's operations. As the market volatility changes the model should adjust to those changes to be successful in the current market climate, not necessarily the climate of last year. As long as they do that, the mark to market is nothing but noise to me that would be factored out of my analysis of operations.

Of course this is easier said than done and thus will always be one of the issues investors must deal with if they want to participate in the commodity market.

I guess this is why they say " investing in commodities is not for everyone".
Tom's LOTM Blog profile picture
With all due respect, this sounds like excuses for management's inability to understand their market and hedge. They should sub-contract their hedging to Anteros Resources (AR) and close their hedging department.
Very well done explanation of hedge accounting. Any thoughts on them acheiving the cash flow projection targets they recently announced?
Long Player profile picture
@JimJoeCPA They tend to be conservative. So I would think good chances
EQT reduced hedges at higher prices. is it again wrong on timing?
Long Player profile picture
@aksh21k Prices are still higher
Prices are falling so if any company was smart to hedge in the 5’s they will look like genius’s.
Long Player profile picture
@jperello001 True and I would bet that not many were
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