Shale gas giant EQT has warned that it may have to post US$1.6 billion in letters of credit (L/Cs) in the wake of its downgrade of debt to junk bond status.

Shale gas producers are easily producing a record amount of gas, with some frackers actually paying pipeline operators to take it off their hands while the market price of gas has sunk to US$2.25 per million British thermal units.

Downgraded, negative outlook

Moody's downgraded EQT's credit rating to Ba1 with a negative outlook, moving it into junk territory after the largest natural gas driller in the US said it would issue new bonds to refinance debt.

"EQT's significantly weakening cash flow metrics in light of the persistent weak natural gas price environment and the company's intent to refinance its 2020 maturities in lieu of debt reduction through repayment drives the ratings downgrade," senior analyst at Moody's, Sreedhar Kona, said.

Subsequently the company warned that getting a junk bond rating could require EQT to post US$1.6 billion in L/Cs to trading counterparties.

Spending slashed

Already this year EQT has taken a US$1.8 billion impairment for the fourth quarter, effectively admitting that its assets were substantially overstated on its balance sheet.

The Pittsburgh-based company has also slashed spending for 2020 by US$50 million to between $1.25 and $1.35 billion, significantly less than the company indicated last year.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.