Call Options Or Put Options On EQT Corporation (EQT)?

| January 2, 2013 | 0 Comments

nat gasEQT Corporation (EQT) is a major player in the development of natural gas in the Marcellus Shale located in the Appalachian Basin of the US.

EQT currently trades for $57.97 per share.  The shares are up 33% from the 52-week low of $43.36 but the shares have recently fallen 7% from the 52-week high of $62.74. 

Is this an opportunity to buy call options on EQT after the sale of their natural gas distribution business?  Or should you buy put options on EQT as they slash their dividend? 

The bulls make a convincing argument…

EQT recently announced they’re selling their natural gas distribution business to Peoples Natural Gas.  In return, they’re receiving $720 million in cash, 200 miles of natural gas transmission pipelines, four natural gas storage pools, and a contract to supply 35 Bcf of natural gas to Peoples Natural Gas per year.

In essence, this deal changes EQT from a natural gas utility to a producer and transporter of natural gas.  Obviously, that’s a big change.  And it’s one that could reap huge rewards for EQT shareholders. 

EQT will immediately generate $40 million of EBITDA every year off of the contract to deliver natural gas to People’s and the new midstream assets every year. 

What’s more, the infusion of cash will allow EQT to invest in their rapidly growing natural gas production and midstream business. 

Right now, EQT’s natural gas production assets total 3.5 million acres, more than 14,000 active natural gas wells, and 5.2 trillion cubic feet of natural gas reserves.  You can be sure they’ll be ramping up development of these assets and will be pumping a lot more natural gas out of the ground.   

But they’re not the only ones ramping up production in the Appalachian Basin.  The Marcellus Shale is one of the hottest areas for natural gas development in the US. 

The addition of new pipeline and storage capacity gives them a bigger footprint on the natural gas transportation infrastructure in the Northeast US.  As other companies pump more natural gas out of the ground, EQT’s pipelines and storage capacity are sure to be in high demand.

In other words, EQT is well positioned to profit from the explosive growth of natural gas development in the area.  It should lead to significant gains in the share price in the weeks ahead.

But the bears have a compelling case as well… 

The impact of the deal to sell their natural gas distribution business could end up being good for EQT in the long run.  But the immediate impact doesn’t look so great.

Don’t forget, this deal fundamentally changes EQT’s business.  And without the distribution business, they’re no longer a utility company. 

To reflect the change in their business, EQT is slashing their annual dividend from 22 cents per share to 12 cents per share.  The nearly 50% reduction in dividends will certainly change the type of investor that want to own EQT.

EQT is no longer an income stock with the potential for some growth.  It’s a growth stock that pays a small dividend. 

In short, EQT is no longer a great income stock.  Investors that owned it for the dividend will likely sell and look for a higher yielding natural gas utility.  This selling pressure will likely lead to headwinds for the stock in the short run.

What’s more, natural gas prices are still depressed.  The reality is supplies of natural gas are growing faster than demand in the US.  And that’s unlikely to change anytime soon.

The combination of low natural gas prices and headwinds from the selling pressure of income investors selling the stock will likely lead to a lower share price in the weeks ahead.  

If you think the bulls are right, take a look at buying the EQT March 2013 $65.00 calls for around $0.50.

If you think the bears are right, take a look at buying the EQT March 2013 $50.00 puts for around $0.80.

Good Investing,

Corey Williams

Tags: , , ,

Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.