Description

Largest producer of natural gas in the United States with operations in the Appalachian Basin.  17.5Tcfe of proved natural gas, NGL and crude oil reserves across 1.3MM acres.

Valuation seems depressed relative to its earnings potential for a few reasons.  Natural gas prices have falling for what seems to be a year and a half after peaking in late 2018.  For an over-levered company with looming debt maturities it has been a tough road.  Management has focused on taking down operating costs and maintenance capex and recently pushed out the debt maturity profile.  Between expected free cash flow and asset sales the company expects to reduce outstanding debt by 1bn by the end of next year bringing leverage below 2x. 

Entering the year the company had over $5bn in debt with significant maturities over the next two years.  End of year filings list $1bn of notes due in October 2021, a $1bn term loan maturing in May 2021 and $750MM notes due November 2021 with minimal cash on the balance.   During the first half of the year, the company issued $500MM in convertible notes and two tranches of senior notes totaling $1.75bn with maturities in 2025, 2026 and 2030.  By using the proceeds to pay down the term loan, notes due in 2020 and a substantial portion of the notes due in 2021, the company effectively pushed out its next significant debt repayment to 2022 and the bulk of its debt maturities beyond 2025. 

The stock currently trades at $13.80 with approximately 256MM shares and has about 4.6bn of net debt on the balance sheet putting the enterprise value at about 8.2bn or about 5.2x 2020 estimated EBITDA.  The valuation is in-line with the recent history, but given the recent rally in gas prices, operations should look materially better next year with consensus estimates showing a ramp in EBITDA (but a wide range). 

Based on the recent 10-Q filing it looks like the company has hedged about 50% of its gas production between $2.50 and $2.90 while gas futures prices have moved to over $3.00 for 2021.  If prices hold for next year (or they continue hedging the remainder of their book at the higher rate as their recent presentation stated) revenues could move past 2019 levels of $4bn.  I believe the majority of that price move should flow through to operating profit and cash flows as the overall volumes aren’t changing significantly from the current year, getting to an EBITDA of over $2.2bn (there will likely be some leakage to cost inflation and production taxes).  If they can hold maintenance capex at current levels (recent calls have suggested it might go down from here) cash flow available for debt reduction could be closer to $700MM.  For reference, the company guided the current year free cash flow to $250-$350MM. 

The company also holds about 25MM shares of Equitrans Midstream which, at current prices, is worth approximately $240MM.  If they sell the shares and use free cash flow to reduce their debt burden it seems likely they will be able to hit their $1bn target by the end of next year.  Assuming they can hold the 5.25x EV/EBITDA multiple and with $3.7bn in year-end debt expected, I get to an equity value of 7.9bn or twice the current market cap, putting the stock $30 vs. $14 today.  

Catalyst

Earnings and free cash flow in 2021