A Greener Path to Meet Energy Demands.
On July 27th, the day after the Olympic opening ceremonies in Paris, the city known as the City of Light was unexpectedly plunged into darkness. Paris, renowned for its brilliant lights, experienced a power outage. What caused it? Not much has been said, but perhaps the surge of visitors from around the world for the Olympics placed too much strain on the grid.
The reality is, there is a surge in demand for electricity, as we discussed in Part I of our series. And the truth is, blackouts could become more common as the demand for electricity continues to grow in major urban centers. Population growth and immigration are significant factors, but data centers, especially AI data centers, are the biggest contributors to this surge in demand.
Data centers, the backbone of our digital world, play a significant role in this strain. Everything we need or store online gets processed or saved in these data centers. Whether it’s working remotely, using AI, or online shopping, all these activities demand massive amounts of electricity, and the demand is only increasing. Data centers, consuming 10 to 50 times as much energy as an ordinary office building, are putting enormous pressure on the power grid.
What’s the solution to this dilemma we find ourselves in? Small nuclear reactors (SMRs) are getting a lot of attention right now, but they won’t be ready for a while. Solar and wind energy are fantastic in theory, but they can’t be counted on when the sun isn’t shining or the wind isn’t blowing. To me, the clear answer is natural gas.
In North America, natural gas is plentiful, affordable, and reliable. It can deliver the consistent and significant power supply needed for data centers and the expansion of AI, crypto mining, and electric vehicles. As AI becomes more integrated into our lives, the demand for stable and economical energy will only grow.
In this issue, I’ll cover my latest portfolio addition: the largest natural gas producer in the United States. This company is the first fully vertically integrated natural gas player in the industry.
Natural Gas Powerhouse.
Two brothers from Pittsburgh, Toby and Derek Rice, have become pivotal figures in the natural gas industry. Their journey began in their late 20s when they started assembling valuable acreage in the Marcellus Shale Basin in 2007. Their father, a private equity banker specializing in oil and gas, undoubtedly influenced their early interest in the industry. The Rice brothers capitalized on the surplus gas production and plummeting prices to acquire significant acreage from struggling producers, quickly establishing their privately-owned firm, Rice Energy, as one of the top ten natural gas producers in the U.S.
In 2017, the Rice brothers sold Rice Energy to EQT Corporation for a staggering $6.7 billion. This merger created the largest producer of natural gas in the United States. However, the story didn’t end there. Unhappy with EQT’s inability to control costs and boost production, the Rice brothers launched a proxy battle in 2019, securing 80% of the votes and effectively taking control of EQT. Toby Rice stepped in as CEO, marking the beginning of a transformative period for the company.
Under the leadership of the Rice brothers, EQT underwent significant operational changes that drastically improved efficiency. By the end of 2021, despite the challenges posed by the Covid-19 pandemic, EQT had become one of the world’s most efficient energy companies. The Rice brothers managed to reduce well costs by 47% and increase drilling speeds by 95%. The financial impact of these improvements was substantial, with EQT’s free cash flow increasing from less than $250 million in 2019 to $1.2 billion in 2023.
EQT Corporation
EQT, based in Pittsburgh, Pennsylvania, is the largest producer of natural gas in the United States. The company's extensive operations span the Appalachian Basin, primarily in Pennsylvania, West Virginia, and Ohio, where it focuses on efficient and sustainable natural gas production.
In a strategic move to further solidify its position in the market, EQT recently completed a significant merger with Equitrans Midstream. Equitrans, a pipeline operator and former business unit of EQT, brings over 2,000 miles of pipelines to EQT's existing infrastructure. This merger has created America's first fully integrated natural gas company, combining production, transportation, and delivery under one umbrella.
The integration of Equitrans' midstream assets is a game-changer for EQT. By controlling every stage of the natural gas value chain, EQT can streamline operations and significantly reduce costs. The company projects that its free cash flow breakeven price will drop to approximately $2.00 per MMBtu, which is among the lowest in North America. This reduction in breakeven costs is achieved through identified synergies that are expected to save over $425 million annually. Such efficiencies ensure robust free cash flow generation across all phases of the commodity cycle, positioning EQT as a resilient player in the market.
EQT's strategic positioning extends beyond cost reductions. The company's vast reserves and production capabilities align perfectly with the rising demand for natural gas, particularly for electricity generation. As the push for cleaner energy intensifies, natural gas serves as a crucial bridge between traditional fossil fuels and renewable energy sources. EQT's natural gas is poised to replace more carbon-intensive coal, thereby contributing to a reduction in overall greenhouse gas emissions.
Furthermore, EQT is well-positioned to supply natural gas to power plants that produce electricity for homes and data centers. The recent merger with Equitrans ensures that EQT can efficiently transport its gas to key markets, including major data center hubs. Data centers, often located in areas like Northern Virginia's "Data Center Alley," require a reliable and steady energy supply to support their immense power needs. EQT's ability to deliver low-cost, abundant natural gas makes it a critical supplier for these energy-intensive operations.
Financial Performance
EQT Corp’s financial performance in recent years has showcased its strength and resilience in the natural gas industry. In 2023, despite facing a challenging market environment with abysmally low natural gas prices, EQT generated a robust $1.2 billion in free cash flow (FCF) on $5.6 billion in sales. This ability to generate significant cash flow even in tough conditions speaks volumes about the company's operational efficiency and strategic management.
Looking ahead, analysts expect EQT to generate $322 million in FCF and $5.8 billion in sales in 2024. This forecast reflects a cautious optimism as the company navigates through a period of low energy prices. However, the outlook for 2025 is much brighter. With natural gas prices anticipated to rise, EQT is projected to generate an impressive $2.4 billion in FCF and $8.3 billion in sales.
A key factor behind this positive forecast is EQT's acquisition of Equitrans Midstream. This merger enhances EQT's operational efficiency and significantly lowers its breakeven costs. As previously mentioned, EQT expects its free cash flow breakeven price to drop to approximately $2.00 per MMBtu, allowing the company to remain profitable even if natural gas prices stay low, ensuring steady cash flow and financial stability.
The merger has also added to EQT's debt load, bringing the combined entity’s total debt to $13.3 billion. However, EQT has a solid plan to reduce this debt quickly. The company aims to pay down approximately $5 billion in debt over the next 12 to 18 months through non-core asset sales and free cash flow generation. This aggressive debt reduction strategy underscores EQT’s commitment to maintaining a strong balance sheet and financial health.
In addition to strong cash flow and proactive debt management, EQT continues to invest in its core operations and strategic growth initiatives. The integration of Equitrans’ midstream assets is expected to unlock significant value by improving the economics of EQT’s drilling locations and enhancing its ability to transport natural gas to high-demand markets, such as data center hubs and liquefied natural gas (LNG) export terminals.
Overall, EQT Corp's financial position is solid, with strong cash flow generation, a strategic plan for debt reduction, and ongoing investments in growth and efficiency. As the demand for natural gas continues to rise, EQT is well-positioned to capitalize on this trend, ensuring long-term profitability and value creation for its shareholders.
Annual Financial Information
| In USD$ | 2023 | 2022 | 2021 | 2020 |
|---|---|---|---|---|
| Sales | $6,909M | $7,498M | $3,064M | $3,059M |
| Net Income (loss) | $1,735M | $1,771M | $(1,143M) | $(967M) |
| EPS | $4.22 | $4.38 | $(3.54) | $(3.71) |
| Shares Outstanding | 381M | 370M | 323M | 260M |
| Cash | $81M | $1,459M | $113M | $18M |
| Total debt | $5,420M | $5,168M | $4,436M | $4,371M |
| Free cash flows | $1,160M | $2,065M | $607M | $496M |
| Dividends | $228M | $204M | -- | $7.6M |
| Current ratio | 1.0 | 1.1 | 0.4 | 0.7 |
| ROE | 13.4% | 16.7% | -11.9% | -10.1% |
| Return on Assets | 7.2% | 8% | -5.8% | -5.2% |
I’m a huge believer in the fact that electricity consumption is only going to surge from here. With more people on the planet and technology becoming an integral part of everyday life, the demand for energy is going through the roof. Every new person represents another device, another connection, and ultimately, another demand for electricity.
While nuclear power—especially small modular reactors—might be the future, they won’t be coming online for several years. In the meantime, the obvious choice to meet our growing energy needs is natural gas. It’s reliable, abundant, and already in place to fill the gap while the world transitions to greener alternatives.
Adding a natural gas producer to my portfolio is also a bit of a contrarian move. Right now, natural gas prices are quite low. Sure, they could drop further, but I’m willing to bet they’re not going to stay this low for long. We’ve seen how quickly they can spike, like they did in 2022 at the onset of the Russia-Ukraine conflict. When demand kicks back in, natural gas could easily skyrocket again.
In terms of investment, natural gas feels like low-hanging fruit. It’s a straightforward play on the ongoing demand for energy, and EQT, as the largest natural gas producer in the U.S., is a solid bet. I’m confident in this addition to my portfolio and plan to hold EQT for as long as possible, riding the wave of increasing energy demand and the company’s strong position in the market.
Portfolio Update
Two weeks ago, in our July issue, I mentioned that we might be on the verge of something major—perhaps a crisis similar to 2008 or even worse. Then, just a week ago on August 5th, I found myself up early, alone in the living room at 5 a.m., casually scrolling through the news on my couch. To my surprise, I saw that the Nikkei had taken a 12% nosedive. It caught me off guard, but I couldn’t help but feel a surge of excitement, thinking that this might be the start of the huge sell-off I’ve been waiting for. The thought that it might bring me closer to my dream of having a significant cash position at the time of the crash of the century was exhilarating. And sure enough, when the markets opened at 6:30 a.m. on the Pacific Coast, they opened lower! My Yahoo! Finance app was lighting up non-stop, with alert after alert as stock after stock took a dive. Even the ones in my portfolio weren’t spared.
It felt like the start of something big, and I’m really hoping for more days like that. In North America, that drop was just a small ripple, but it’s a start. I’ve got this gut feeling that September is going to be incredibly volatile. We’re already hearing about new MPOX outbreaks, and the WHO had an emergency meeting on August 7th to figure out the next steps. Could we see lockdowns again? Or at least a significant dip in travel? If that happens, it could spell trouble for hotel stocks, airlines, cruise lines, and restaurants.
And that’s not all. The news is filled with reports of layoffs, restaurant closures, weaker consumer spending, and personal debt hitting new highs. Intel announcing plans to lay off around 15,000 workers doesn’t help the situation either. With the U.S. elections just around the corner and unrest in the UK, I’m bracing for a wave of global market volatility.
Here in Canada interest rates are starting to slide. The place where I’ve parked a chunk of my cash has dropped from paying 4.55% to 4.05%. Since October 2023, I’ve been locking in 1-year GICs each month at the going rate, which was 5.47% back then. Today, a one-year GIC that pays monthly is going for just 4.27%.
Something big—and potentially bad—feels like it’s lurking just around the corner. Because of this, I’ve decided to pause adding any new positions to the portfolio for now. Instead, I’m focusing on letting my cash reserves build up and refining my top wishlist of stocks to snap up when the crash of the century finally hits. And that crash might come sooner than expected. I suspect that the Canadian real estate market is on the verge of breaking, and we’ll soon start hearing about mass layoffs on a global scale.
Portfolio Composition
| As of August 9th, 2024 | |
|---|---|
| Category | Portfolio Weight |
| Cash and GICs | 89.02% |
| Speculative Picks | 1.87% |
| Defensive Picks | 8.56% |
| Crypto | 0.55% |
| TOTAL | 100% |
Remember that the content of this newsletter is neither a stock recommendation nor investment advice. This is just something to consider. You can access my watchlist and portfolio through the link below. By clicking the link below you accept all responsibility for any potential losses that might result from buying any of the stocks mentioned in this newsletter.