Tag Archives: stocks

EQT Corporation – Strong Position In A Growing Natural Gas Field

Summary EQT Corporation has watched its stock price drop by more than 50% since the start of the oil crash. For an oil company, the company’s dividend is negligible dividend. At the same time, the company’s natural gas production is growing rapidly bringing increasing earnings. Introduction EQT Corporation (NYSE: EQT ) is one of the largest natural gas producers in the Appalachian Basin. The company is headquartered in Pennsylvania and operates throughout the Appalachian mounts. The company has significant stakes in the natural gas fields there. EQT Corporation – RMUS Entry Media EQT Corporation has had a difficult time recently. The company has seen its stock price drop from $110 per share before the oil crash in mid-2014 down to recent lows of just over $50. At the same time, the company has a negligible dividend yield of 0.23% compared to a dividend yield almost 7 times that in 2012. Investment Highlight s Now that we have talked about the company, let us now talk some about the company’s investment highlights. The company has 10.7 trillion cubic feet of proven reserves amounting to 22 years of production at the current rate. At the same time the company has 42.8 trillion cubic feet of 3P reserves amounting to more than 87 years. On top of that, the company has a proven ability to increase its reserves with a > 25% forecasted production volume sales growth for the year of 2015. At the same time, the company has a 90% interest in EQGP (NYSE: EQGP ) which has a $4.8 billion market cap and has dropped almost 40% since the start of the crash. Lastly the company has a strong equity position. The company has $1.7 billion in cash along with a $1.5 billion undrawn credit revolver. The company’s cash position amounts to approximately $10.6 per share, impressive for a company in such difficult times. (click to enlarge) EQT Resources – EQT Investor Presentation The above image shows the company’s resources along with its impressive acreage and midstream assets. The company’s 9100 pipeline miles and 3.4 million acres leave significant room for the company to explore. These explorations could significant increase the company’s reserves. Production Growth Now that we have talked about the company’s investment highlights, it is time to talk about the company’s production growth. (click to enlarge) Marcellus Shale Production – EQT Investor Presentation The above image shows the company’s Marcellus Shale play which has impressive growth potential. The company began horizontal drilling on the area in 2008 and has seen 32% year over year growth since then. That has resulted in production growing from 200 million cubic feet a day from 2008 up to 1800 million cubic feet per day in 2015. (click to enlarge) EQT Proven Reserves – EQT Investor Presentation The company’s proven reserves have also impressive grown as a result of the company’s Marcellus shale assets. The company’s reserves in the Marcellus have grown from 2.879 billion cubic feet in 2010 to 8.284 billion feet in 2014. The company’s Marcellus assets also make up more than 50% of its 3P reserves. (click to enlarge) EQT Development Area – EQT Investor Presentation The company is currently focused on developing its core Marcellus assets with much if it focused in a core development area. This area contains 600,000 acres along with an impressive 23.3 trillion cubic feet or 3P reserves of 31 trillion cubic feet of total resource potential. At the same time the company drilled 138 wells in 2015 and plans on continue drilling additional wells. (click to enlarge) EQT Production Costs – EQT Investor Presentation At the same time, the Marcellus plays, the company’s largest assets have impressive fundamentals even after taxes. The company’s current margins after tax at $2.5 natural gas are 22%. With current natural gas prices at $2.05 the company should barely be breaking even. (click to enlarge) EQT Operating Expenses – EQT Investor Presentation However, the company has been maintaining noticeably lower operating costs compared to the rest of its peers. The company’s per-unit operating expenses are the lowest among its peers while the company’s 3-year F&D costs are the fourth rank among its peer group. Conclusion EQT Corporation has had a difficult time recently watching its stock price drop more than 50% since the start of the original stock market crash. At the same time, the company offers a negligible dividend of roughly 0.23% per year. As a result, I do not recommend investors get involved for the dividend. However, the company has an impressive Marcellus asset play with millions of acres and tens of trillions of cubic feet worth of reserves. The company drilled over 150 wells in 2015 and plans to continue drilling a large number of additional wells that could increase its reserves. For investors interested in averaging into a strong position at a low prices, EQT Corporation is a strong corporation with huge potential. Those who get into now and average down should see impressive long term gains.

A Market Neutral Strategy To Profit From High Yield Bonds

Summary KKR Income Opportunities is a closed end fund that invests in high yield bonds and senior loans. While the 10.6% yield and the 14% discount to NAV may look tempting, some investors are worried about a continuation of the weak trend in this space. In this article I will present a market neutral strategy that can benefit from a compression in NAV discount while hedging a significant portion of the market risk. In a recent post I talked about the KKR Income Opportunities Fund (NYSE: KIO ) and how I found it attractive for income seeking investors. The biggest concern I have on that fund is the risk that weakness in high yield and leveraged loans may persist in 2016. In that case the 10% yield may be partially eroded by a declining NAV or a widening of the discount to NAV. For this reason I decided to dig further into this space and tried to devise a strategy that reduces the market risk while allowing investors to benefit from a reduction in the NAV discount. This strategy may be interesting for sophisticated investors that have access to and are familiar with the pros and cons of shorting. The strategy The strategy I have in mind involves going long KIO and at the same time hedging the position by shorting a combination of two related ETFs: the iShares iBoxx High Yield Corporate Bond ETF (NYSEARCA: HYG ) and the SPDR Blackstone/GSO Senior Loan ETF (NYSEARCA: SRLN ). For more details on KIO I encourage you to read my previous post . Here I am going to give you a quick snapshot on HYG and SRLN before detailing the reason why I believe this strategy could deliver superior risk adjusted returns. HYG is an ETF that gives you exposure to US high yield bonds. It is very well diversified, with more than a thousand securities in the portfolio and a concentration of 4.7% of NAV in the top 10 names. The effective duration of the fund is 4.3 years while the total expense ratio is 0.5%. According to the latest fact sheet the credit rating breakdown is the following: SRLN is an ETF that gives you exposure to leveraged loans. It is less diversified than HYG with a total of 192 securities and has a concentration of 15% of NAV in the top 10 names. The average maturity is a bit less than 5 years but interest rate risk is minimal as loans are generally indexed to Libor. The total expense ratio is 0.7% and the most recent credit breakdown is the following: Analysis of the trade Considering that KIO is a fund that invests in high yield bonds and loans and is trading at approximately 15% discount to NAV I believe one could effectively short a combination of HYG and SRLN at prices close to NAV and go long KIO to take advantage of the mispricing. I would go short $1,500 of HYG + SRLN for each $1,000 in KIO to take into consideration the level of leverage in the KKR fund (a third of the assets are financed through a credit facility). The following analysis shows the NAV performance of $1,000 invested in KIO since the beginning of the year and compares it with the NAV performance of $1,500 invested in HYG +SRLN. The analysis includes the dividends distributed by all the funds. What you can see from the analysis above is that KIO outperformed both HYG and SRLN on a distribution adjusted basis in terms of NAV. I attribute a good part of that outperformance to the significant underweight in the energy sector of the KIO fund. Despite that, the stock performed poorly, down 12% for the year due to an increase in the NAV discount or down 4% after taking into consideration the distributions received. What to expect from the trade As you are short $1.5 for each $1 invested in KIO you are expected to “pay” a dividend cost of approximately 7.5% for your short: 5% is the average yield on HYG and SRLN and that needs to be multiplied by 1.5. This outflow will be more than compensated by a 10.6% dividend in KIO. All things staying the same and excluding tax considerations you net 3% and you are likely left with some spare cash given that you are shorting more than your long investment. In a positive scenario you can expect the NAV discount to reduce over time providing an additional source of profits. In terms of NAV performance you can expect a very similar development for your long and your short: KIO is a bit weaker in terms of average rating but has a lower exposure to the tricky energy sector. Some of you may ask a question: is this a pure arbitrage trade? I want to stress that this is not an arbitrage trade. Underlying securities in the two portfolios are different, sector weightings are different and portfolio concentration is different. However overall performance of the different assets should show a very strong correlation, with the main difference being that you buy a portfolio at a 15% discount and you sell a similar (but not identical) portfolio at par. Your biggest risk exposure lies in the possibility that the discount to NAV widens further in KIO. That should happen only in case of a new sharp drop in the value of the assets. I believe that would represent a great opportunity to cover my short at a profit and double down on KIO at an even cheaper valuation relative to the market value of its underlying assets and I would be more than willing to take that risk.