“…EQT is up a whopping 610% over the last 20 years, S&P is up 231%. I’m sorry, that’s truly incredible out-performance which is why I keep featuring these stocks.
EQT is one of the lowest cost producers of natural gas out there. With total production costs of $2.30 per thousand cubic feet, an average finding development cost of just $1.14 per 1,000 cubic feet over the last years…They can sell it for four times of that… EQT is also growing its production, up 19.5% year over year for the fourth quarter. 20% production growth for 2010. It’s a growth stock. Much of the growth comes from the shale in Appalachia where EQT is drilling like crazy.
The company plans to have 40 to 50 new wells in the Marcellus shale in 2010 and expects production to double for the year. This stuff is incredible. Thanks to the Marcellus that EQT’s proven reserves hit 4.1 trillion feet at the end of 2009, up 31%. The company also has a total of 26 trillion cubic feet of potential resources…” –CNBC’s Mad Money 2/1/2010
Cramer has crusaded on the behalf of natural gas a lot recently believing that domestic natural gas production could go a long way towards solving some of the difficult energy problems we face. He is a proponent of using natural gas as a bridge fuel to transition the U.S. economy away from crude oil and coal towards greener alternatives which are not able to carry the load yet. On Monday evening, he has brought forth yet another stock that he thinks could have huge upside when he interviewed Murray Gerber, CEO of EQT Corp. (EQT), formerly known as Equitable Resources.
He points to EQT’s solid out-performance of the broad market over both short and long term time frames, and the fact that production is growing at a very rapid rate as reasons to excite investors. Furthermore, the company has successfully grown production while keeping costs low, which is a positive reflection on management. Last week, the firm delivered an impressive earnings beat, earning 52 cents per share versus analysts’ estimates of 39 cents. The market has started to take notice of this performance and the earnings report last week provided a catalyst to boost the stock about 7%. Cramer, who is never shy about making a bold statement, said he wouldn’t be surprised to see this stock triple.
At Ockham, we cannot share the same optimism for EQT Corp. because our methodology already shows the stock is Overvalued. We downgraded the company coming into this week, as it is currently trading above its historically normal valuation ranges. For example, price-to-cash earnings is currently 18.3x, which is well above this company’s historical range of 9.5x to 17.1x. Similarly, price-to-sales normally ranges between 2.3x and 4.1x, but at the current price level yields 4.7x revenue per share. Cramer would argue that EQT’s growth accounts for the significant premium that the shares are being given, but current estimates show revenue declining slightly in fiscal 2010 (then a large bump up in 2011).
We share Cramer’s aspirations for increased usage of domestic natural gas, but it will take quite a bit of effort and some of that would surely be directed from Washington. Right now it does not appear to be near the top of the political agenda, and may not be until something knocks us out of our comfort zone (geopolitical threat, spike in oil prices, etc). At this point, we would advise waiting for a dip in EQT before it becomes an attractive stock for value investors.
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