What's Driving EQT's Stellar Performance?

Recent financial results for EQT  (NYSE: EQT  ) have been impressive, raising two important questions for investors: How did it happen, and can it continue? One success factor was the market flexibility afforded by the company's midstream assets, which allowed it to sell more gas in high-priced markets. EQT is continuing to build on that edge.

Anatomy of success
Income from continuing operations attributable to EQT for the quarter ended March 31, 2014 was $192.3 million compared with $65.2 million for the same quarter a year ago. This near tripling was the result of a 59% surge in revenue along with growing margins. Even adding in discontinued operations, which boosted the earlier quarter's earnings by about $35 million, the net earnings still rose 92% during the period.

The lion's share of this improvement came from gas sales. According to EQT's filing, the results were "primarily attributable to a 28% higher average effective sales price for natural gas and natural gas liquids (NGLs), a 30% increase in natural gas and NGL volumes sold," which raised gas revenue from $270.4 million to $516.6 million. While other factors generally offset each other, this $246 million increase in gas revenue is about equal to the overall change in revenue during the year.

Rising natural gas prices clearly don't tell the whole story, otherwise every other company would show similar results. Unlike the global oil market, natural gas prices vary widely by region. The ability to get the gas to the right market at the right time was the key to boosting revenue. EQT's filing said, "EQT utilized its firm capacity to move gas to sales points where demand was high due to the unusually cold winter. The sale of gas at these sales points at high prices resulted in gains that more than offset the cost of third-party gathering and transmission in the first quarter of 2014."

Midstream flexibility is the key
EQT has both an upstream production business and a midstream gathering, storage, and transmission business. Although the production business gets credit for the increasing revenue, the company's strategic use of its flexible midstream assets made this possible.

EQT is the general partner for EQT Midstream Partners  (NYSE: EQM  ) , a master limited partnership, or MLP. The partnership owns and/or operates 2,500 miles of gathering and transmission pipeline, providing midstream services to EQT and others in Pennsylvania and West Virginia.

According to company materials, "The Partnership believes that its strategically located assets, combined with its working relationship with EQT, position it as a leading Appalachian Basin midstream energy company serving the Marcellus Shale region."

This working relationship allowed EQT to move its gas to the right markets at the right time. The map shows the flexibility of EQT Midstream's network, which is able to send gas to any of five interstate pipeline systems. This allows a producer like EQT to choose its market, thus taking advantage of changing regional conditions.

EQT Midstream continues to build out its flexible system, as evidenced by projects like the Mountain Valley Pipeline. This joint venture with NextEra Energy will serve the growing natural gas demand in the southeastern U.S. The planned capacity is two billion cubic feet per day, and EQT expects the line to be in service by the end of 2018.

The Zen of Foolishness
It's important to know how a company has been performing, but that's not enough. Investors need to know if the performance is due to skillful management, one-time factors, or just good luck. To determine if a company can maintain its performance, dig into its operations. Is there an identifiable reason for the performance? Is the company continuing to build on that factor? In the case of EQT and EQT Midstream, the answers are both "yes."

If you can't locate the reason for success, be wary and move on. If you can, then you may have just found yourself a winner.

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