Let’s discuss the potential of EQT Corporation (NYSE:EQT), the largest natural gas producer in the U.S.
This company offers attractive prospects for investors due to several positive factors, including higher natural gas prices driven by favorable market conditions, efficient operations, expanding opportunities in the LNG market, improved pipeline access, downside protection through hedges, and a strong balance sheet.
In an article titled “EQT Corporation: Why I’m So Bullish On This Natural Gas Driller,” I previously highlighted the bullish potential of EQT. Since then, the stock has rallied 14%, benefiting from the rise in natural gas prices.
If natural gas futures continue their upward trend, especially with the possibility of a cold winter in the Northern Hemisphere, EQT’s growth potential could be further accelerated.
Outlook for Natural Gas
Natural gas prices are volatile and challenging to predict. However, with the notable increase in U.S. dry natural gas production, driven primarily by the Permian Basin, the supply-demand dynamics are expected to support higher prices in the future.
The Energy Information Administration (EIA) projects steady natural gas production over the next year, followed by a growth phase in late 2024, driven by new pipeline infrastructure and increased LNG demand. In fact, total LNG capacity is expected to increase by 150% by 2027.
EQT anticipates a favorable natural gas demand outlook, especially from higher LNG demand. However, certain factors such as pipeline capacity constraints in the Permian Basin, moderate production declines in other areas, and constrained pipelines in the Appalachia region might limit supply growth.
EQT’s Strengths and Market Position
Compared to its peers, EQT is a Pittsburgh-based industry giant with substantial operations in the productive Appalachia region. Appalachia offers not only a rich history in the coal industry but also significant opportunities for efficient natural gas companies.
EQT, responsible for 6% of total U.S. natural gas output, is well-positioned in terms of scale, inventory depth, and environmental advantages. With top-tier operational efficiency and prudent capital spending, EQT aims to maximize value creation for shareholders and generate strong free cash flow.
The company’s strategic hedging approach for 2024 production, combined with its LNG strategy and commitment to debt reduction, further reinforces its attractive prospects.
Moreover, EQT’s financial performance is impressive. It has retired significant debt, improved its balance sheet, and secured investment-grade credit ratings. The company’s strong free cash flow outlook indicates potential for higher shareholder distributions and future buybacks.
Valuation and Growth Potential
Evaluating EQT’s valuation is challenging due to its correlation with natural gas prices. However, based on its high double-digit free cash flow yield projection in the years ahead, the company appears undervalued.
Analysts expect strong free cash flow generation, even without a substantial increase in natural gas prices. The potential for future production efficiency gains and a steady debt reduction strategy could contribute to significant stock price appreciation.
Consensus price targets currently indicate a potential increase to $48, representing a 9% upside from the current price of $44. However, if natural gas prices continue their upward trend, analysts may raise their price targets to $80-$90.
Conclusion
EQT offers an enticing investment opportunity in the dynamic natural gas market. With favorable tailwinds, efficient operations, strategic moves into the LNG sector, and a commitment to debt reduction, the company is well-positioned for growth.
While EQT is a less aggressive choice compared to some players in the industry, conservative investors can still benefit from its considerable upside potential. Furthermore, its proactive hedging strategy, strong free cash flow outlook, and focus on shareholder value creation make EQT an attractive proposition.
Considering EQT’s current undervaluation and the possibility of rising natural gas prices, investors may expect substantial stock price appreciation in the coming years.
