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Why EQT Stock Dropped after Its Q2 Earnings

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On July 25 at 1:53 ET, EQT Corporation (EQT) stock was down 7.8% in the wake of its second-quarter earnings release. It reported adjusted EPS of $0.09 in the quarter, higher than analysts’ consensus estimate of $0.02. On a YoY (year-over-year) and sequential basis, its adjusted EPS fell 30.7% and 89.2%, respectively.

EQT’s total sales volumes dipped 13 Bcfe (billion cubic feet equivalent) compared to the first quarter. Moreover, falling sales and lower natural gas prices dragged its adjusted operating revenue down 20.8% in the second quarter. Its realized natural gas prices fell approximately 18% on a sequential basis. In the quarter, Henry Hub natural gas prices averaged their lowest level since the second quarter of 2016. Increasing natural gas production could be driving weaker natural gas prices.

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EQT’s total operating costs per Mcfe (thousand cubic feet of equivalent) rose 10.1% sequentially despite its management’s commitment to higher operational efficiencies. These factors may have squeezed its EPS to its lowest point in the last two years. EQT operates with a production mix of 95% in natural gas.

Lower guidance may have hit EQT

Moreover, EQT generated -$81 million in adjusted free cash flow in the quarter. It expected an additional cash flow of $25 million in the quarter compared to its earlier guidance, which didn’t include litigation reserves or proxy-related expenses. It also lowered its adjusted free cash flow guidance for 2019 to $25 million–$125 million from $300 million–$400 million. Its management also lowered its adjusted EBITDA guidance by 11.7%, which could be a big setback for investors.

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Stock price outlook

EQT’s production guidance for 2019 has remained unchanged between 1,480 and 1,520 Bcfe. Moreover, at the midpoint of the company’s guidance, it expects its total production to grow 5 Bcfe in the third quarter. It will be too little for stock prices, as there’s no clear sign of recovery in natural gas prices. In fact, based on the US Energy Information Administration’s Short-Term Energy Outlook, natural gas prices are expected to fall 8.8% in the second half. Oil prices might also trend downward for the rest of this year. Unless the company’s current management makes a turnaround in its business, the remaining months of 2019 could be bleak.

Mean target price

Analysts’ mean target price for EQT is ~$21.57, which implies a potential upside of ~35.5% based on its last closing price. Chesapeake Energy’s and Cabot Oil & Gas’s target prices suggest potential upsides of 21.2% and 50%, respectively.

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