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

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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 The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Commodities

Referenced Stocks: DDM , EQT

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