EQT Midstream Has Plenty Of Work In The Pipeline, No Puns Intended

Summary

• EQT is trading at a discount due to overall market weakness, not company-specific problems.
• The company has multiple projects planned for the future to increase earnings and dividend growth.
• Therefore, investors should stay long shares of EQT for its stock price appreciation potential and growing dividend payouts.

EQT Midstream Partners LP (NYSE:EQM) has fallen alongside the rest of the midstream sector, implying that its share price performance is not necessarily indicative of actual company fundamentals.

EQT has plenty of catalysts on the horizon to drive future earnings, including MVP, Hammerhead, the Equitrans Expansion Project, and MVP Southgate.

All of these projects should drive significant EBITDA for EQT through 2020 and should mostly be done through cash flows, instead of issuing shares, which eliminates risks of being diluted. Furthermore, the increase in earnings will also allow for stronger dividend coverage, and even possibilities to raise its dividend.

So, the current backlog available to EQT should not only drive significant earnings for the company in the future but should also strengthen its cash position and help ensure the sustainability of its unusually high dividend of 9.88%.

Also, the stock is off over $30 points from its highs and trades at only 10x earnings. As a result, investors should stay long EQT for the combination of its strong stock price appreciation potential and dividend growth expectations.

EQT Has Multiple Projects In The Pipeline

As alluded to above, EQT has multiple projects in the works to drive future earnings, including the Mountain Valley Pipeline (MVP for short), Hammerhead, Southgate MVP, and the Equitrans Expansion Project, to name a few.

50% of the highly anticipated, Mountain Valley pipeline was completed last winter, according to the Q3 conference call. But what is needed to finish are nationwide permits which were vacated by the Fourth Circuit Court of Appeals during the fall of 2018.

Thankfully, the revised nationwide 12 permits issued by the Army Corps of Engineers are expected to be in hand for EQT by early 2019, which will allow the company to complete the other half of the pipeline.

Hammerhead, which will connect to the MVP, is another project expected to drive significant EBITDA for EQT. Source: Seeking Alpha.com

CapEx had to be revised $555 million higher for Hammerhead in the latest quarter because 7 more miles were added to the pipeline, and apparently, some labor inflation did occur.

However, once the project is completed, which is expected to be in Q4 of 2019 (the same time as MVP), Hammerhead will bring in about $75 million annually in EBITDA for the company, generating strong cash flows.

MVP Southgate, which is expected to be in service by Q4 2020, will run gas from MVP to North Carolina and has $300 million a day of firm capacity commitment from PSNC Energy.

Source: Seeking Alpha.com

The Equitrans Transmission segment of EQT's is also going strong, as the company moved an average of 3 Bcf per day through the system, which was a record. EQT is even adding 37 miles of pipe and 32,5000 hp of compression for more flow. Needless to say, both of these updates will increase Equitrans volumes and earnings in the future.

EQT's water business acquired from the Rice Energy deal will also add another $100 million in EBITDA in 2019, potentially, and synergies from the acquisition should save the company another $300 million to $500 million over the next five years if items like gathering systems can be tied together.

Financials Strong

EQT reported $365 million in operating revenues for the third quarter of 2018, with distributable cash flow coming in at $219 million. The recent Rice Energy acquisition accounted for almost half of EQT's revenue reported at $148 million, clearly demonstrating the earnings power Rice Energy brings to the table for EQT.

Revenues are also expected to rise significantly in the coming years due to the projects listed above, with EBITDA expected to increase 50% by 2021 to $1.8 billion.

Operating expenses did increase by $71 million mostly as a result of the acquisition, which comes as no surprise. Expenses were essentially flat for EQT's legacy business year over year, proving that the sudden rise in operating expenses is contained to the acquisition and should be a one-time event.

In addition to healthy earnings, EQT's cash distribution for the third quarter was 14% higher than the same period as last year, and their coverage ratio was strong 1.05x. Debt to EBITDA was also strong at 3.0 times, which is less than their top-quality competitor in MPLX LP (MPLX).

The company also has ample access to capital with only $22 million drawn on their existing revolver and, therefore, does not anticipate resorting to equity markets for funds or diluting shares.

Risks

EQT is aware of the risks facing the oil & gas industry, which include lower commodity pricing, steep decline rates, and rising interest rates.

However, the company has accepted these conditions and actually embraces the responsibilities required to operate in such an environment by undertaking certain initiatives, such as operating within cash flows to avoid problematic debt payments from rising rates and assuming a lower for longer commodity price environment, which could slow customer's growth rates.

The company also believes that there is so much quality acreage for E&Ps to operate on for the next decade that, even if their largest customer struggles, they will still comfortably meet their EBITDA goals. Here is more on what the company had to say about their risk management strategy:

So if we're going to assume that we're going to be in a lower for longer commodity price environment, and I think we have to change the priorities of the company and focus first and foremost on the strength of our balance sheet, our retained cash flow and coverage ratio because then that will allow us to continue to fund more and more of our project backlog with cash as opposed to debt and further push out into the future any need we may have for equity.

And then as you go through our priority list, that's going to signal us toward the distribution growth rate that we've indicated in the press release which I think is 8% to 10%. So, though again, I don't mean to be flippant, but we feel pretty good about the guidance we've provided based on the current environment what our expectations are for our largest customer and the opportunities that we see in the basin with others.

EQT is essentially taking the UPOD approach for investors, which is to underpromise and overdeliver. Their forecasts are built on conservative models that assume modest production growth for their largest customer, and should continue to allow for their growing dividend to be sustained.

Conclusion

EQT has plenty of business to increase earnings and dividend payouts in the coming years, such as MVP, Hammerhead, Southgate MVP, and others mentioned above.

In fact, EBITDA is supposed to grow 50% by 2021, and all models are based on conservative estimates. They also assume a lower for longer oil price environment and slower growth by even their largest customer.

Therefore, these developments should assuage investor's fears of EQT's dividend sustainability in the future and, consequently, provide incentive to add to EQT shares on the recent dip that occurred from overall market weakness, not company-specific issues.

Analyst’s Disclosure: I am/we are long AMZA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.