A prudent investment decision involves picking of stocks with solid prospects and selling those that carry risks. At times, it is rational to retain certain stocks that have enough potential but are weighed down by tough market conditions.
Here we focus on EQT Corporation EQT , a natural gas production company, which is expected to register high growth in the near future. However, the same is being pulled down by a couple of negative traits. The company's net operating revenues of $4,557.9 million in 2018 lagged the Zacks Consensus Estimate of $4,830 million. The divestitures of Permian Basin and Non-Core Huron assets affected its top line. But the company never missed the Zacks Consensus Estimate for earnings in the trailing four quarters, the average being 6.3%.
EQT Corporation Price and EPS Surprise
EQT Corporation Price and EPS Surprise | EQT Corporation Quote
Let's analyze the things that are leaving the stock stressed and can also hamper its upcoming results.
EQT Corporation's total operating expenses are on the rise. Through last year, expenses escalated significantly to $7.3 billion from $2.7 billion in 2017. Moreover, for 2019, gathering expenses per thousand cubic feet equivalent (Mcfe) are expected in the range of 55-57 cents, higher than 54 cents in 2018. Transmission cost per Mcfe is likely to be in the 48-50 cents band. The upper limit is higher than the 2018 level of 49 cents. If this trend continues, the company's profits might get eroded.
Investors might also get worried over the Rice Energy acquisition. EQT Corporation anticipated this buyout to bring in cost synergies and lift profit levels. However, in reality, as the well cost components were capitalized by the company, it resulted in artificially deflating expenses and increasing profit levels.
The company's lack of geographic diversification is also concerning since its entire asset base is located in the Appalachian Basin. As such, it is more vulnerable to basin-specific delays and interruptions in production from wells, which is likely to dent growth.
Despite these downsides, investors should consider the stock's growth potential, which can offset these obstructive effects.
Some Growth Factors in View
EQT Corporation is among the leading natural gas players in the United States with footprint of 680,000 net acres in the prolific Marcellus shale play. The company projects its total 2019 production in the range of 1,470-1,510 billion cubic feet equivalent (Bcfe). The upper limit of the band is much higher than the 2018 level of 1,488 Bcfe. This will be supported by its humongous proved developed reserves of 11.6 trillion cubic feet equivalent. Further, this will reflect the company's production capabilities.
Moreover, being a prolific natural gas producer, EQT Corporation is well placed to capitalize on rising demand for cleaner energy. Hence, the company is likely to meet its target of generating free cashflow in the range of $300-$400 million through 2019. The firm is also projecting cumulative free cashflow of more than $2.9 billion over the next five years.
Another positive news for investors is that EQT Corporation's board of directors separated the company's upstream from midstream businesses, forming an independent publicly traded company, Equitrans Midstream Corporation, operations of which focus on the midstream businesses of EQT Corporation. The spin-off is expected to enable EQT Corporation to concentrate on its upstream assets, and exploration and production business. This shows the company's dedication to generate unparallel profit levels from its upstream operations. One must not forget that the company's earnings per share in fourth-quarter 2018 were in line with estimates and also improved significantly from the year-ago quarter on the back of higher production sales volume and increased realizations.
Some people surely recognized the stock's positives to shrug off the headwinds, evident from the stock's 5.1% gain in the past three months, having outperformed the 1.3% rise of the industry it belongs to.
Moreover, in terms of the EV/EBITDA ratio - one of the best multiples for valuing oil and gas companies because energy firms have a large amount of debt and EV (Enterprise Value) including debt for valuing company or industry - EQT Corporation seems undervalued. The company currently has a trailing 12-month EV/EBITDA ratio of 4.8, below the broader industry average of 5.4.
Zacks Rank & Key Picks
Given the aforementioned reasons, we think holding on to the stock and waiting for a better future is more logical. Thus, EQT Corporation currently has a Zacks Rank #3 (Hold). Investors interested in the energy sector can opt for some better-ranked stocks as cited below:
Denver, CO-based Antero Resources Corporation AR is an upstream energy company. Its top line for 2019 is expected to increase 11.8% year over year. The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .
Austin, TX-based Jones Energy, Inc. JONE is an exploration and production company. For 2019, its bottom line, which has witnessed one upside revision over the past 60 days, is estimated to grow 19% year over year. The company currently holds a Zacks Rank #2 (Buy).
Lonestar Resources US Inc. LONE is a Fort Worth, TX-based exploration and production company. Its top line for 2019 is envisioned to increase 4.3% year over year. It currently has a Zacks Rank of 2.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report EQT Corporation (EQT): Free Stock Analysis Report Antero Resources Corporation (AR): Free Stock Analysis Report Jones Energy, Inc. (JONE): Free Stock Analysis Report Lonestar Resources US Inc. (LONE): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research