EQT: 5x Free Cash Flow For This Natural Gas Player Is A Serious Bargain
Summary
- With gas prices now closing in on $9 mbtu, EQT is going to make a ton of free cash flow this year and 50% higher in 2023.
- EQT's balance sheet is one of the best amongst the natural gas players.
- A discussion of EQT's production hedges for 2023.
- EQT is priced at less than 5x its 2023 free cash flows. A very cheap valuation.
- As always, happy to discuss my thesis further in the comments section.
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Investment Thesis
EQT (NYSE:EQT) is a natural gas production company. With natural gas prices moving higher and staying higher for longer, EQT is a strong beneficiary.
There's a lot to like about the company. It has a robust balance sheet, with two rating agencies assigning EQT an investment-grade rating.
The one minor blemish is that the company was too aggressive with its hedging book, meaning that 45% of its book is hedged in 2023.
That being said, EQT still oozes free cash flow and deploys significant sums back to shareholders via repurchases and dividends.
Paying less than 5x next year's estimated free cash flows is a very satisfying valuation.
Why EQT? Why Now?
EQT sells natural gas and natural gas liquids ("NGL"). With inflation spiking commodity end-product prices higher, it is incentivizing the use of natural gas for the production of these commodities.
When it comes to EQT, the setup here is quite simple and there's no need to overcomplicate this thesis.
Trading Economics, natural gas price
As you can see above, natural gas prices are soaring higher and are now very close to $9 mbtu. With higher natural gas prices, companies like EQT are going to sizzle higher.
There are only 3 considerations that an investor needs to know.
- In what shape is the balance sheet?
- How much free cash flow will the company make?
- How hedged is its book?
Everything else is a distraction.
Capital Return Program
EQT has a robust debt profile. Amongst natural gas players, it's not the strongest, but it is undoubtedly strong. As EQT exited Q1 2022, it carried a net debt position of 1.9x leverage.
That being said, EQT contends that at the current strip prices, EQT would finish 2022 with a net debt to EBITDA of approximately 0.8x. However, since EQT made that assertion approximately a month ago, gas prices have jumped higher by nearly 30%.
Consequently, I suspect that EQT will probably finish 2022 with net debt closer to 0.6x at current strip prices.
EQT Q1 2022 presentation
Furthermore, as you can see above, EQT has no meaningful near-debt maturities. This supports the argument that EQT is investment grade, with both Fitch and S&P providing EQT with an investment-grade profile.
Altogether, this implies that EQT is well set up to deploy substantial capital to shareholders.
In fact, over the first 4 months of the year, EQT had deployed approximately $230 million towards share repurchases. And with the benefit of hindsight, these repurchases were a terrific use of capital, as EQT repurchased approximately 2.5% of the total number of shares outstanding.
EQT still has approximately $700 million left to deploy as part of its announced $1 billion share repurchase program. Together with its approximately $200 million assigned for dividends, this means that in 2022, EQT will have returned to shareholders approximately 8% of its market cap.
EQT Q1 2022 presentation
Moreover, EQT contends that even after $1.5 billion towards debt reduction, $1 billion for share repurchases, and close to $200 million towards dividends, between 2022 and 2023, it will still increase the cash on its balance sheet by approximately $3 billion in cash.
Next, we'll turn our focus to EQT's valuation.
EQT Stock Valuation - 5x Free Cash Flow
Antero Resources May presentation
As you can see above, EQT still carries a substantial amount of hedges into 2023. The information in the graphic above is echoed in the table below.
EQT Q1 2022 presentation
If we take EQT's 2022 production guidance of 2,000 (Bcfe) and assume a roughly similar volume output in 2023, this implies that approximately 45% of its total production is hedged for 2023.
This will prevent EQT from benefitting from maximum exposure to higher natural gas prices.
EQT Q1 2022 presentation
Nevertheless, EQT believes that in 2023, with the remainder of its book that is not hedged this will allow EQT to generate 50% more free cash flow than in 2022.
Consequently, EQT believes that it could make approximately $3.5 billion of free cash flow in 2023.
The Bottom Line
EQT is an awesome investment. The only blemish in the investment thesis is that the company is 45% hedged in 2023, which prevents it from gaining maximum exposure to higher gas prices.
Nevertheless, even with that consideration, the company is still going to ooze free cash flow in 2023 and generate approximately $3.5 billion of free cash flow.
Paying less than 5x free cash flow for an investment-grade company is a bargain. To preempt your question, I don't own shares in this company, I own shares in a peer. Whatever you decide, good luck and happy investing.
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