Natural Gas Giant Downgraded to Junk Status in America

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EQT Logo
  • Massive write down by EQT
  • Big player in Marcellus
  • Junk bond rating by Moody’s

Pittsburgh-based EQT has just announced a massive write-down for its assets, showing that the shale sector in the United States continues to face fundamental problems with being profitable, at least when it comes to natural gas.

the shale sector in the United States continues to face fundamental problems with being profitable

In a regulatory filing on Monday, EQT has written down $1.8 billion for the fourth quarter, as the natural gas market continues to plummet. The company said that the write-down was a result of “changes to our development strategy, and a renewed focus on a refined core operating footprint.” In other words, the company is admitting that its assets are worth much less than once believed. It also has cut spending for 2020 to $1.25 billion, down by another 50 million compared to the guidance that the company had given in the third quarter of last year.

Largest natural gas producer in the US

The company is highly visible in the Marcellus shale region and is the largest natural gas producer in the country. EQT purchased Rice Energy in 2017, making it the country’s largest gas producer and pipeline company, but has posted very disappointing results in the last three years as the value of natural gas continues to plummet. The plummeting value of natural gas during 2019 has only offered more pain for the company.

The Henry Hub natural gas prices for February delivery trade at roughly $2.18, while they are trading even lower at the Dominion South hub in Pennsylvania, near the rock-bottom price of $1.83/MMBtu. EQT admits that it cannot succeed in an environment where gas prices are so low. It is a massive issue that many companies around the United States are suffering with, as the commodity is simply oversupplied.

The Americans drilled 17% more natural gas during 2019 than they did in 2018, and the fact that the winter has been very mild in the United States has provided a  “one-two punch” to the value of natural gas as it is extraordinarily cheap, especially considering the time of year.

This will lead to a lot of major concerns later in the year when temperatures rise, and demand drops even further. The oversupply of natural gas will take some time to work through, and there will probably be several bankruptcies along the way in order to balance the market back out again.

The ratings downgrade

Moody’s cut EQT’s credit rating on Monday to Ba1, with a negative outlook. This moves it into junk territory after the gas giant said it would issue new bonds to refinance it’s already heavy debt burden. Moody’s suggested that this was due to significantly weakening cash flow metrics in light of a persistent week natural gas market.

The fact that “the company is looking to refinance 2020 maturities in lieu of debt reduction through repayment drives this ratings downgrade”, according to senior analyst Sreedhar Kona. In this environment, it’s difficult to imagine that things are going to getting better for EQT, as well as many other major market players. 2020 is going to be a brutal year for these companies in the natural gas space.

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