Let's dive into EQT Corporation (NYSE:EQT), the largest natural gas producer in the United States. While I don't currently hold a position in this company, I'm genuinely enthusiastic about its prospects. EQT boasts several factors that make it an attractive investment opportunity.

Speaking of natural gas prices, they can be quite unpredictable due to the unique dynamics of the natural gas market. Unlike crude oil, natural gas has a more favorable supply situation, which tends to put downward pressure on prices. However, there are several factors currently working in favor of higher natural gas prices.

According to the Energy Information Administration (EIA), the first half of 2023 witnessed a substantial increase in dry natural gas production, with a remarkable 6 Bcf/d surge compared to the previous year. This growth can be attributed to the Permian Basin, a key player in U.S. natural gas production. The Permian Basin's natural gas production is closely linked to oil drilling activities, which are expected to continue driving up production levels.

Looking ahead, the EIA predicts that natural gas production will remain relatively stable for the next year before showing signs of growth in late 2024. This growth will coincide with the commissioning of new pipeline capacity and the increased demand for liquefied natural gas (LNG) feed gas, as two new LNG facilities are set to become operational by the end of 2024. By 2027, total LNG capacity is expected to grow by a staggering 150%.

These developments suggest that natural gas prices are poised for a long-term uptrend, albeit with expected volatility. Antero Resources (AR) has made a compelling case for a demand-supply gap over the next two years, driven primarily by increased LNG demand. Supply constraints, such as limited pipeline capacity in the Permian, production moderations in Haynesville, and constrained pipelines in the Appalachia, further support the bullish outlook for natural gas prices.

Now, let's shift our focus back to EQT. While I personally opted for AR due to its higher volatility and potential upside, EQT presents a more stable and conservative investment option. It's essential to note that even though EQT is considered conservative, it remains quite volatile compared to typical blue-chip stocks.

EQT, headquartered in Pittsburgh and operating in the resource-rich Appalachia region, is a natural gas behemoth. In fact, if EQT were a country, it would be the world's 12th-largest natural gas producer, contributing to 6% of total U.S. natural gas output.

In the second quarter, EQT reported production figures in line with prior guidance, thanks to the efficient execution by its drilling and completions team. While there were some operational challenges related to Shell's ethane cracker, EQT is actively taking measures to address these issues. The company's operating revenues were $2.11 per Mcfe, and operating costs fell within the lower end of the guidance range, resulting in a healthy operating margin despite low natural gas prices.

EQT also noted the potential softening of inflationary pressures, including declining steel casing prices. As a result, efforts to enhance efficiency could lead to lower well costs in 2024. The company has reaffirmed its 2023 production outlook, capital budget, and operating expense guidance.

One noteworthy aspect of EQT's strategy is its proactive hedging approach. The company has strategically increased its hedge positions for 2024, demonstrating its commitment to debt reduction and willingness to bet on higher prices by refraining from excessive hedging, a tactic employed by some peers in the industry.

Furthermore, EQT has taken significant steps in its LNG strategy by signing a Heads of Agreement (HOA) for tolling capacity at Lake Charles. This strategic move aims to diversify a portion of its production into international markets while balancing the risks and rewards. EQT's ambition to expand its presence in global energy markets is apparent, as it seeks to structure deals with downside price protection and interact with prospective international buyers.

EQT's efficiency in production is widely acknowledged, ranking among the top three in terms of capital spending relative to sales. The company believes that its assets are undervalued by the market, with the potential for significant value creation through robust free cash flow generation. Even at $2.50 Henry Hub, EQT can generate up to $900 million in free cash flow, which accounts for 5% of its market capitalization. If natural gas prices continue to rise, this number could increase to 7%.

Analysts share this optimism, forecasting $2.6 billion in 2025E free cash flow, even without a substantial surge in natural gas prices. This translates to a compelling 16% free cash flow yield. Additionally, investors can expect higher shareholder distributions in the future, as EQT continues to improve its balance sheet.

During the second quarter, EQT retired $800 million of debt, marking a significant step towards achieving its balance sheet objectives. The company has now retired a total of $1.9 billion of debt since late 2021, reducing leverage and securing investment-grade credit ratings from two out of three credit rating agencies. With no debt maturities in 2023 and 2024 and nearly $5 billion in available liquidity, EQT is well-positioned.

In terms of shareholder returns, EQT has a $0.60 quarterly fixed annual dividend, yielding 1.4%. The company also has over half of its $2.0 billion buyback program remaining. Since December 2021, EQT has repurchased 5.4% of its shares, indicating the potential for further buybacks as free cash flow continues to grow.

In summary, EQT Corporation presents a compelling investment opportunity in the dynamic natural gas industry. With favorable market conditions, efficient operations, and strategic moves into the LNG market, EQT is well-positioned for substantial growth. While I tend to favor more aggressive players personally, EQT stands as a strong, less risky choice for conservative investors, offering significant upside potential.

The company's proactive hedging strategy, focus on debt reduction, and robust free cash flow outlook make it an attractive proposition. Moreover, EQT's current undervaluation suggests the potential for substantial stock price appreciation in the coming years, especially if natural gas prices maintain their upward trajectory. Keep an eye on this one; it's a promising player in the natural gas sector.