May 3, 2022

This week we will add an American energy company engaged in hydrocarbon exploration and pipeline transport, EQT Corp. (EQT).

Market Overview

It was one of the most challenging weeks we’ve seen in a while for traders, and especially the bulls, as Tuesday saw steep losses, Thursday the market soared higher, and then Friday we witnessed yet another meltdown.

For the week, the Dow lost 2.5%, the S&P 500 fell 3.3% and the tech-heavy Nasdaq declined 3.9%. Year-to-date the Dow, S&P 500 and Nasdaq are lower by 9.2%, 13.3% and 21.2%, respectively.

Earnings season took over the headlines last week, with inflation concerns moving to the background (temporarily). And while earnings were mixed (at best), the ongoing war in Ukraine, lockdowns in China and an unexpected contraction in the U.S. economy never fully allowed any of the positives, like growth in consumer spending, to gain momentum.

Buckle up … it’s going to be another wild week!

This week we will add an American energy company engaged in hydrocarbon exploration and pipeline transport, EQT Corp. (EQT).

New Recommendation

The Stock – EQT Corp. (EQT)
Why the Strength
While the market’s in shambles, many energy names are still hanging in there due to amazing cash flow profiles, and some of the best today can be found in the natural gas sector, where prices were in the dumps for years but are now elevated, with supply/demand dynamics very supportive.

EQT Corp. is the largest producer of natural gas in the U.S., with more than a million net acres in the Marcellus and Utica shales (mostly in Pennsylvania and West Virginia) and 15-plus years of drilling inventory, as well as an investment grade balance sheet that it’s continuing to improve.

After years of belt-tightening, the firm is set to do very well even at prices that were common in recent years. In Q1, the firm’s realized price (after money-losing hedges) was just $3.19, yet with constrained CapEx and operating costs, the firm cranked out a whopping $580 million in free cash flow (~$1.50 per share), which allowed it to repay $569 million of debt, buy back 9.9 million shares (nearly 2.5% of outstanding shares) and pay a decent base dividend (1.3% yield). In fact, EQT thinks it will have plenty of money to pay the base dividend, repay another $600 million-ish of debt and buy back another $700 million of stock, all by the end of next year—even at $2.85 natural gas!

At current strip prices, it sees north of $2.5 billion of free cash flow this year (more than $6.50 per share), and if this holds into next year, that figure could be more like $10 per share, which would lead to massive special dividends, share buybacks and the like. (EQT already doesn’t have any debt maturities until 2024.)

While the plan is to keep production flat, it’s possible some new LNG deals could change that, but either way, EQT is poised to spin off huge amounts of cash for years to come, even assuming natural gas prices fade back toward the levels of the past few years.

Technical Analysis
EQT had a gradual ascent after the March 2020 crash recovery, eventually hitting a wall at 23 in the spring of last year and moving mostly sideways for the better part of a year. But the breakout in March was solid, and EQT went vertical after, basically doubling in just a few weeks! Impressively, the stock’s latest pullback, while sharp, has found support near the 25-day line—we think further dips are likely, and if they come, we think a small buy would be worthwhile. Stop—31.5

The Covered Call Trade
Buy EQT Corp. (EQT) Stock at 42, Sell to Open June 42 Strike Calls (exp. 6/17) for $2.80 or a Net Price of 39.20 or less

Static Return: $280 per covered call (7.14%)

Breakeven: 39.20

Covered Call Return (if assigned): $280 per covered call (7.14%)

Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.

However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 39.20 or less. (In this case 42 minus 2.80 = 39.20. Or another example is you could pay 43 for the stock and sell the 42 call for 3.80, which also equals 39.20.)

For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …

Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.

The next Cabot Profit Booster issue will be published on May 10, 2022.