EQT Corporation (EQT) operates as a leading independent natural gas producer with operations in core areas of the Appalachian Basin, stretching from central Alabama to New York's Adirondack Mountains. The company is headquartered in Pittsburgh, Pennsylvania.
The persistence of significant factors predisposing to the rise in gas prices has resulted in EQT Corporation shares rising more than 66% since the beginning of the year, outpacing the market.
While this was happening, the S&P 500 (SPX), the benchmark index for the U.S. stock market, recorded a 20% decline. Based on the same factors, EQT's stock should continue to rise, and as such, I think a bullish approach to this stock would be correct.
The BackdropThe predisposing factors to higher gas prices can all be traced back to the war in Ukraine. As this conflict appears to be long-lasting (as the geopolitics development suggests), gas prices should see further upward pressure.
The war in Ukraine is causing gas shortages as aggressor Russia increasingly cuts supplies to its key European customers in response to Western sanctions to end the conflict. Russia has so far received six packages of sanctions from Western countries that hit its economy and target the wealth of several of its oligarchs.
Among the European countries targeted by the Russian measures are Finland, Poland, and Bulgaria - either because they have expressed a desire to join NATO or because they provide a platform to respond to Ukrainian President Volodymyr Zelensky's requests for military aid.
Recently, Italy and Germany have been added to the list of countries receiving lower volumes of gas from Russia. A few days ago, Gazprom announced gas reductions on the Nord Stream 1 pipeline to Germany and on streams to Italy via Eni S.p.A. (E), the Italian global Oil & Gas company.
While the Russian operator cited temporary technical difficulties as the reason for the decision, the impression is different in Germany and Italy, as they believe the measure is the result of a political decision.
This will put further pressure on gas prices, as spot markets believe that Germany and Italy, whose energy needs are 45% or more dependent on Russian gas, will struggle to cope with dwindling gas supplies from Russia.
These countries will not have an easy time, even if they enter into supply contracts with other countries or try to expand renewable energy sources.
Favorable Gas Prices Forecasts for EQTEconomists expect natural gas to trade at ~$11 per Metric Million British Thermal Unit (MMBtu) in 12 months' time, reflecting an increase of more than 58% from ~$6.94 per MMBtu (at the time of writing).
EQT's gross profit margins and free cash flows are on track to improve amid rising gas prices, taking the stock price higher than current levels and roughly following the footsteps of Q1-2022's operations.
In the first quarter of 2022, driven by a 51.3% increase in natural gas futures maturing in July 2022, EQT's Adjusted EBITDA and free cash flow from operating activities increased impressively.
Year-over-year, adjusted EBITDA increased 33% to $927 million, while free cash flow from operations increased more than 120% to $580 million.
Thanks to these impressive management results, the U.S. natural gas producer has significantly reduced its debt (it stood at $5.05 billion as of March 31, 2022), repurchased a significant portion of its common stock, and reinstated its dividend payments (a quarterly distribution of $0.125 per share).
According to Toby Rice, president and CEO of EQT Corporation, all of this management performance has earned them an investment-grade credit rating, meaning rating agencies have a lot of confidence in the company's creditworthiness.
The effects on the share price did not take long to materialize. A month after the release of first-quarter financial results, the stock price peaked on June 7 at $50.41 per share, up more than 160% from its trough in early 2022.
Commenting on the company's financial results for the first quarter of 2022, Toby Rice added that the company increased the range of projected free cash flow for this year by 50% to $2.2 billion to $2.5 billion due to the positive outlook for natural gas prices.
Not Only Prices but Also VolumesThe globalization of markets is causing the North American economy to feel the geopolitical tensions between Europe and Russia over gas.
So, in addition to the higher price, EQT and other U.S. operators will benefit from the need to increase the supply of gas streams to balance U.S. natural gas liquid (NGL) exports to meet the increased demand from European countries.
Looking ahead to full 2022, EQT forecasts to sell a higher total volume of liquefied natural gas compared to the previous year, that is 16,950 - 17,550 thousand barrels (Mbbls) this year, versus 16,900 - 17,300 Mbbls in 2021.
Wall Street's TakeIn the past three months, 14 Wall Street analysts have issued a 12-month price target for EQT. The stock has a Strong Buy consensus rating based on 12 Buys, two Holds, and zero Sell ratings assigned in the past three months.
The average EQT price target is $53.43, implying 48.7% upside potential.
ValuationShares are changing hands at $35.94 as of the writing of this article, for a market cap of $13.3 billion, an EV/EBITDA ratio of -16.8x and a price-to-book ratio of 1.6x.
The stock's price has fluctuated between a low of $15.71 and a high of $50.41 over the past 52 weeks. So currently, the share price is trading above the middle point of the 52-week range and significantly above the 200-day moving average price of $27.60.
These statistics indicate that the stock is not cheap, but given the growth potential, an investment in EQT is worth considering.
ConclusionWhile gas prices have many tailwinds, EQT's balance sheet continues to improve significantly. This stock should attract more bullish sentiment.
EQT's business brings relative certainty in an uncertain market.