EQT Corporation (EQT - Get Rating) in Pittsburgh, Pa., is the largest independent natural gas producer in the United States, with a core asset base across the Appalachian Basin. Surging natural gas prices have driven EQT’s stock to substantial price gains over the past few months. Shares of EQT have gained 53.7% year-to-date and 8.9% over the past month.

Because natural gas prices are expected to hit a 13-year high this winter, analysts expect EQT to gain momentum in the coming months. The $26.73 12-month median price target for the stock indicates a 36.9% potential upside from yesterday’s closing price of $19.53.

However, EQT’s bleak financials and stretched valuation might make its rally unsustainable, especially in a volatile market.

Here’s what we think could shape EQT’s performance in the near term:

Lawsuits

Shareholder rights firm Barr Law Firm, WeissLaw LLP, and Halper Sadeh LLP are currently investigating whether EQT violated federal securities laws or breached fiduciary duties during its acquisition of Alta Resources Development LLC in May.

Also, the company is currently a named defendant in a class-action lawsuit that alleges misrepresentations by EQT to investors regarding the synergies of its acquisition of Rice Energy in December last year. EQT initially filed a motion to dismiss the case, which was rejected in Pennsylvania’s United States District Court.

Bleak Financials

As the global economy moves toward reducing its carbon footprint, natural gas has emerged as an effective alternative to fossil fuels, given its substantially lower carbon emissions. This, coupled with gradual reopening of countries worldwide, has resulted in improved sales margins for the company. EQT’s total sales volume increased 21.7% year-over-year to 421 billion of cubic feet equivalent (Bcfe) in its fiscal second quarter ended June 30.

Despite a slight increase in average realized price per millions of cubic feet equivalent (Mcfe), EQT’s net loss worsened 255.9% from the same period last year to $936 million. Its loss per share was  $3.35, which compares with the prior-quarter’s $1.03  loss per share. In addition, EQT’s net operating cash flows fell 90.4% from their year-ago value to $43 million.

POWR Ratings Reflect Bleak Prospects

EQT has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

EQT has a D grade for Quality and Value. Its negative ROE is in sync with the Quality grade. Also, EQT’s 40.25 non-GAAP forward P/E ratio is 277% higher than the 10.68 industry average, which is  consistent with the Value grade.

Of the 93 stocks in the Energy – Oil & Gas industry, EQT is ranked #85.

Beyond what we’ve stated above, we have rated EQT for Growth, Momentum, Sentiment, and Stability. Get all EQT ratings here.

Bottom Line

Despite being the largest natural gas producer in the country, EQT’s trailing-12-month profit margins are negative. Its EBIT margin and net income margin are negative 42.57% and 42.05%, respectively. In fact, despite improving sales volume in its last reported quarter, the company’s net loss widened, reflecting inefficient operations.

While the industry tailwinds are expected to propel EQT higher, we think it is susceptible to a substantial pullback when bullish sentiments abate . Furthermore, considering the market’s surging volatility, with the CBOE Volatility index gaining 8% over the past five days, EQT is best avoided now.

How Does EQT Corporation (EQT) Stack Up Against its Peers?

While EQT has an overall D Rating, one might want to consider looking at its industry peers, Baytex Energy Corp. (BTEGF - Get Rating), Amplify Energy Corp. (AMPY - Get Rating), and Adams Resources & Energy, Inc. (AE - Get Rating), which have an overall B (Buy) rating.

EQT shares were trading at $20.38 per share on Wednesday afternoon, up $0.85 (+4.35%). Year-to-date, EQT has gained 60.35%, versus a 19.83% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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