ClearBridge Investments, an investment management firm, published its “All Cap Value Strategy” fourth quarter 2021 investor letter – a copy of which can be downloaded here. The ClearBridge All Cap Value Strategy had a positive absolute return for the fourth quarter but underperformed the benchmark Russell 3000 Value Index. On an absolute basis, the Strategy posted gains in 10 of 11 sectors in which it was invested during the quarter. The main contributors to the Strategy’s performance were the materials and health care sectors. The sole detractor to the Strategy’s performance was the communication services sector. Spare some time to check the fund’s top 5 holdings to have a clue about their top bets for 2022.
ClearBridge Investments All Cap Value Strategy, in its Q4 2021 investor letter, mentioned EQT Corporation (NYSE:EQT) and discussed its stance on the firm. Founded in 1888, EQT Corporation (NYSE:EQT) is a Pittsburgh, Pennsylvania-based energy company with a $13.6 billion market capitalization, and is currently spearheaded by its CEO, Toby Z. Rice. EQT Corporation (NYSE:EQT) delivered a 66.71% return since the beginning of the year, while its 12-month returns are up by 97.07%. The stock closed at $36.36 per share on April 04, 2022.
Here is what ClearBridge Investments All Cap Value Strategy has to say about EQT Corporation (NYSE:EQT) in its Q4 2021 investor letter:
“Our broad investment case on energy stocks is reflective of this dynamic. The collapse in demand and oversupply from shortcycle shale, as well as mounting narrative and real risks of declining terminal oil demand from ESG and the global energy transition, has resulted in an absolute collapse in capital spending, despite historically low inventories and a 60% increase in the price of oil in 2020.
However, these same dynamics have driven a massive improvement in the fundamentals of U.S. oil and gas producers, as free cash flow generation has exploded and returns on capital have skyrocketed well above the cost of capital. Most importantly, producers are signaling continued discipline by returning record amounts of capital to shareholders, rather than drilling to grow production. However, even with this metamorphosis, energy producers’ market-leading performance in 2021 was completely driven by the overwhelming strength of fundamentals as earnings increased over 300%, rather than by earnings multiples, which compressed over 60%.
A stark example of this is natural gas producer, EQT. The market is concerned, and rightfully so, that current natural gas prices are cyclically elevated. The 2022 and 2023 forward prices, averaging $3.80/mcf and $3.50/mcf, respectively, are above a realistic marginal cost for natural gas producers, and it’s reasonable to assume prices will go down over time. In other words, EQT would be overearning before its hedges for 2022 and 2023, and as such should trade at a multiple below mid-cycle levels. While this is a rational line of thought, the magnitude of the gap between current valuation and a reasonable mid-cycle level is much too wide. Based on 2023, which provides the cleanest look given fewer hedges booked, a price of $3.50/mcf would generate EQT approximately $2.4 billion in free cash flow. This would amount to a massive 28% of the company’s current market cap. Over the long term, natural gas prices should average somewhere between $2.75/mcf and $3.25/mcf, given the newfound capital discipline among shale drillers and mounting demands both domestically and via export. At the midpoint of these prices, EQT’s free cash flow would equate to 14% of its market cap, still one of the most attractive levels in the market. The windfall cash flow generation between now and then will be put to good work: reducing debt, reducing shares outstanding and paying out a highly competitive dividend yield. The debt and share count reduction alone should force the market to acknowledge the true earnings power of the company, further amplifying EQT’s sustainable cash generation capacity.”
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Our calculations show that EQT Corporation (NYSE:EQT) failed to obtain a mark on our list of the 30 Most Popular Stocks Among Hedge Funds. EQT Corporation (NYSE:EQT) was in 46 hedge fund portfolios at the end of the fourth quarter of 2021, compared to 57 funds in the previous quarter. EQT Corporation (NYSE:EQT) delivered a 62.25% return in the past 3 months.
In March 2022, we published an article that includes EQT Corporation (NYSE:EQT) in the 5 Dividend Stocks to Buy According to Billionaire Dan Loeb’s Third Point. You can find more than 100 investor letters from hedge funds and prominent investors on our hedge fund investor letters 2021 Q4 page.
Disclosure: None. This article is originally published at Insider Monkey.
