EQT Corp

Iran-backed Houthi rebels have taken control of the Bab al-Mandeb strait, according to several news reports. Also, last week, drone attacks damaged the critical East-West pipeline, forcing Saudi Arabia to shut it down.

Why it matters: The Bab al-Mandeb Strait is another critical Middle Eastern maritime chokepoint, aside from the Strait of Hormuz, while the East-West pipeline is a critical artery that crosses Saudi Arabia and connects it to the Red Sea. Saudi Arabia used both as a workaround to the current crisis. Before the war, roughly 4%-7% of global liquids moved through Bab el-Mandeb, though EIA estimates have shown that figure rose during the second quarter. Houthi control of this strait disrupts one of the world's major suppliers and heightens the risk of escalation. While we previously flagged that recovery was quicker than expected following the now-failed earlier Memorandum of Understanding between the US and Iran, we now believe something akin to our prior bear case scenario is more likely and that the disruption of flows will persist into 2027.

The bottom line: We aren't changing our $65 per barrel Brent midcycle oil price estimate, as stated in real terms, but we're far more concerned about near-term supply disruptions than we were previously. While Saudi Arabia can keep loading crude, it must rely on a thin storage cushion. How quickly flows normalize will depend on how fast Saudi Arabia can restore the pipeline. We've read that the country could partly restore the pipeline through one of its two lines, even as full repairs could take multiple weeks. But even so, Houthi control of the Red Sea will still hurt flows. We continue to model oil price futures in our next two-year assumptions as we have no edge over markets here. Long-term, however, we see greater opportunity in the gas supply chain in names such as Expand, Antero, and Baker Hughes, particularly as cheap Permian supply hurts gas companies.

We have lowered our fair value estimate to $70 per share from $55 after increasing our assumed Henry Hub midcycle natural gas price to $3.70/mcf from $3.30/mcf. Growing demand for natural gas in the US, particularly from LNG exports and power consumption, drove the increase to our outlook. We expect US natural gas demand to grow from 107 bcf/d to 148 bcf/d by 2035, which will require higher-cost marginal supply.

We assume oil (West Texas Intermediate) prices in 2026 and 2027 will average $81 and $72 per barrel, respectively. In the same periods, natural gas (Henry Hub) prices are expected to average $3.10 and $3.49 per thousand cubic feet. Terminal prices are defined by our long-term midcycle price estimates (currently $65/bbl Brent, $60/bbl West Texas Intermediate, and $3.70/mcf natural gas).

Our fair value estimate corresponds to enterprise value/EBITDA multiples of 7.6 times for 2026 and 8.7 times for 2027. Our production forecast for 2026 is 6,813 million cubic feet of gas equivalent per day, slightly above company guidance. That drives 2026 EBITDA to $7.0 billion; we expect free cash flow of $3.3 billion in the same period. For 2027, we estimate production of 6,599 million cubic feet of gas equivalent per day, EBITDA of $6.1 billion, and free cash flow of $3.3 billion.

EQT earns no moat. We find difficulty assigning a moat to any gas producer, as we need to see a cost advantage for the firm that allows it to earn excess returns through the cycle.

Natural gas’ economics mean it’s unlikely even the lowest-cost producer can reliably generate cumulative excess returns through the cycle. That’s a different dynamic from oil producers, which produce a higher-value commodity that can be moved more easily and cheaply, netting back more value to the producer.

The economics of oil production also hurt natural gas producers. Oil-focused producers make all their profit on oil and natural gas liquids, sometimes resulting in natural gas being sold at a loss or even at negative values. Oil operators were extremely active in the early 2020s when prices were high, but this will further weigh on natural gas-focused producers like EQT in the coming years. Wells have gotten longer and more efficient, meaning that fewer wells are needed to maintain production. This means the average well is getting older. An older shale oil well produces a disproportionately higher share of natural gas in total production. The Permian Basin in Texas and New Mexico is the highest-profile aging basin. Gas coming from the Permian can displace supply like EQT’s on the Gulf Coast due to the differing economics.

There is a potential for EQT to earn excess returns. EQT has become one of the nation’s largest gas marketers, and coupled with its extensive infrastructure, it can capture more of the value of its molecules. The MVP, a pipeline extending from EQT’s core acreage to demand in Virginia and, soon, North Carolina, allows it to boost sales exposure to these premium markets. The acquisition of Equitrans also lowered its cost of production by re-negotiating expensive service agreements.

EQT has also entered into structured sales agreements with power consumers, notably data centers in the basin. However, these are at local index plus pricing, limiting the upside potential. Producers see deals like this as a way to grow without threatening in-basin pricing and potentially tightening it relative to out-of-basin indexes. We are skeptical. Gas production is profitable at today's differentials. If pricing improves, it would make sense for other producers to step in and compete away the advantage.

In 2026, EQT struck a 10-year supply agreement with a power producer with pricing linked to PJM (or electricity prices) rather than natural gas. Should these terms be replicated by other power producers, they could substantially disconnect EQT's in-basin price from competitors'.

The artificial intelligence and data center boon to energy demand in the Northeast and mid-Atlantic could boost local gas demand and improve margins as the cost of local delivery is far lower.

Natural gas is critical to the energy transition, which could result in higher, durable demand. EQT is well positioned to take advantage of demand growth due to its exposure to several regions and export markets.

Further takeaway capacity expansion to markets other than the Gulf Coast, such as the Midwest and Southeast, could result in narrower differentials and higher realizations.

Natural gas has historically been an unprofitable product that is sold at a loss by oil and natural gas liquids producers in the Permian Basin. Stronger activity by these players drives US gas prices down.

EQT is almost fully exposed to natural gas prices, and any price decline poses a material risk.

Shale oilfields are aging, and older wells produce more natural gas. Fields like the Permian that saw breakneck growth are now stagnating, with fewer wells needed to maintain production resulting in higher gas production.