Analyst Actions: EQT Midstream Partners Cover Initiated With Outperform, TP of $30 at Credit Suisse; Hits Yr Highs Today

By Staff,

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Growth in Marcellus and Sponsor Dropdowns Drive Positive Outlook; INITIATING Coverage with an OUTPERFORM Rating & TP of $30

Initiating Coverage at Outperform: We are initiating coverage of EQM with an Outperform rating and a $30 target price. Based on our target price and distribution growth forecasts, EQM provides a one-year total return potential of ~23%. EQM offers a good risk/reward profile within our coverage universe tied to the growth in infrastructure development in the Appalachian basin.

Poised for Strong Distribution Growth following Successful IPO: Post its IPO, EQM is well positioned to drive long-term distribution growth, given (1) its sponsor EQT Corp. ( EQT ) has a large portfolio of midstream assets in the Marcellus shale play that can be dropped down to EQM; (2) no direct commodity exposure with a large portion of its cash flows based on long-term fixed fee-based contracts with a remaining weighted average life of ~9.5 years; and (3) a strong balance sheet supporting future financing requirements. Our model assumes ~$1.0B of dropdowns from EQT over the next four years at an attractive EBITDA multiple of 9.0 times. In our view, EQM should be able to grow its distributions at a 10.2% CAGR over the next five years through a combination of organic growth and dropdowns.

Valuation: We derive our $30 target price by applying a combination of three-stage distribution discount model ( DDM ), EV/EBITDA, and target yield, giving us a valuation range of $27-32. Our DDM assumptions include a discount rate of 9.0%, distribution CAGR of 10.2% over the first five years and 3.4% over the following five years, and a terminal growth rate of 1.5%. Our $30 price target implies a yield of 5.1% in the 2Q13 (12 months out) based on a forecasted annualized distribution of $1.52 per unit.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright (C) 2014 All rights reserved. Unauthorized reproduction is strictly prohibited.

This article appears in: Investing Commodities
Referenced Stocks: DDM , EQT

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