Upstream And Midstream Integration Will Deliver Operational Synergies

Key Takeaways

• Acquisition and integration of Olympus Energy assets enhance free cash flow and revenue through cost efficiencies and strategic positioning.
  
• Deleveraging the balance sheet and higher free cash flow support potential EPS growth, dividends, and buybacks.
  
• Acquisition increasing debt raises risk if synergies fail; unhedged strategy and market volatility also threaten income and revenue stability.

Catalysts

Engages in the production, gathering, and transmission of natural gas.

• The acquisition of Olympus Energy's upstream and midstream assets is expected to be highly accretive, offering 4% to 8% cumulative free cash flow per share accretion over the next three years. This should enhance both revenue and free cash flow due to the attractive EBITDA multiples and strategically positioned assets near demand centers.
  
• EQT's strategic focus on integrating its upstream and midstream operations is resulting in robust synergy capture, with $360 million annual savings already identified. This contributes positively to net margins by achieving cost efficiencies and optimizing resource allocation.
  
• EQT is exploring in-basin demand opportunities with talks of numerous power generation projects and gas-fired facilities that could increase local demand by 6 to 7 Bcf per day by 2030, potentially enhancing revenue and offering pathways for sustainable growth.
  
• The strategic decision to enter into firm sales deals with major Southeastern utilities projects an improved gas price differential, tightening from $0.60 to $0.30 by 2028. This is expected to yield a $600 million pre-tax annual free cash flow tailwind, positively impacting both net margins and earnings.
  
• The continued deleveraging of EQT’s balance sheet from $9.1 billion at year-end 2024 to a forecasted $7 billion by the end of 2025, combined with the high free cash flow generation capability, is expected to support EPS growth and shareholder returns through possible dividend increases and strategic buybacks.

EQT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming EQT's revenue will grow by 12.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.0% today to 42.1% in 3 years time.
• Analysts expect earnings to reach $3.7 billion (and earnings per share of $5.65) by about April 2028, up from $369.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $6.0 billion in earnings, and the most bearish expecting $2.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.8x on those 2028 earnings, down from 83.0x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.02%, as per the Simply Wall St company report.

EQT Future Earnings Per Share Growth

Risks

• The acquisition of Olympus Energy for $1.8 billion, while potentially accretive, increases EQT's net debt, which could stress cash flows if the expected synergies do not materialize or if gas prices fall. This could impact net margins and free cash flow.
  
• Despite bullish signals for natural gas prices, the inherent risks of volatility in gas markets and potential for overproduction in response to price signals could impact revenue stability and net income.
  
• EQT's decision to remain unhedged for 2026 and beyond, while it could capture upside in a high-price scenario, leaves the company vulnerable to downside risks if gas prices fall, affecting earnings.
  
• Execution risks tied to potential synergies from acquisitions and operational improvements may not meet expectations, resulting in higher than anticipated operating expenses or capital spending, ultimately affecting net margins.
  
• The reliance on future in-basin demand growth and power project engagements, which are in nascent stages, could present risks if these projects do not materialize or face delays, impacting forecast revenue and earnings growth.

Valuation

• The analysts have a consensus price target of $56.296 for EQT based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $74.0, and the most bearish reporting a price target of just $35.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.7 billion, earnings will come to $3.7 billion, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $51.22, the analyst price target of $56.3 is 9.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.