(By Balaseshan) Deutsche Bank analyst Curt Launer initiated coverage of EQT Midstream Partners LP (NYSE:EQM) with a "Hold" rating and $27 price target.
Launer said EQM owns high growth midstream assets in the Marcellus Shale and has the potential for significant growth related to its parent company, EQT Corp. (NYSE:EQT), which owns 57.4% of its LP shares.
The analyst said the substantial drop-down opportunities from EQT as well as EQM's organic value-enhancing projects support a double digit distribution growth rate for the next several years. EQM has risen 22% since its IPO on July 2, 2012 and now shows a distribution yield of 5.5%.
While we are convinced of EQM's asset quality and growth potential, Launer regards the upside since the IPO as creating a valuation that warrants a "Hold" rating currently.
The analyst said EQT Midstream assets are located in the Marcellus, a shale play anticipated to maintain its rapid growth trajectory that it experienced over the past few years. Wood Mackenzie estimated the growth in the Marcellus to be 25% per year from 2011 to 2016. This bodes well for the volume growth at EQM.
A significant portion of EQM's revenue comes from EQT, which is expected to grow its drilling at the Marcellus by 68% in the next two years. Furthermore, Launer estimates EQT owns over $2.0 billion of MLP-able midstream assets that could be drop-downed to EQM.
The analyst said EQT midstream assets excluding EQM are expected to generate $228 million EBITDA over the next twelve months and EQT continues to actively develop its midstream assets.
Launer said EQM generates nearly 100% of the revenue on fixed-fee basis, which reduces the sensitivity of its cash flows to the commodity prices. Moreover, a meaningful portion of EQM's revenue comes from firm capacity reservation, which further improves the stability and visibility of EQM's revenue stream.
In 2011, EQM generated 64% of the revenue from capacity reservation charges under long-term firm contracts. The weighted average remaining contract life for EQM's firm transmission and storage contracts was 9.5 years, the analyst noted.
The brokerage established its 2012 EPS estimate for EQT Midstream Partners of $1.79 and its 2013 estimate of $1.94.
EQM is trading up 2.38% at $26.26 on Monday.