DOWNGRADE to NEUTRAL (from Outperform) on Valuation. Hold $30TP.
Thesis on Strong Distr Growth Intact.
Downgrade to Neutral (from Outperform) on Valuation: EQM hasn't
looked back since its IPO and has generated handsome returns for
its investors. (Please refer to the Initiation report published on
July, 23) Based on its annualized minimum quarterly distribution,
the MLP is currently yielding a rich 4.7%. Although we are still
confident about EQM's potential based on organic growth and future
drop-down acquisitions, we believe the potential is reflected in
the price of the units. Including the forecast NTM distribution of
$1.46/unit, we project total return potential of (5%) - 11.5%,
supportive of downgrading the units to a Neutral rating.
Investment Thesis for Strong Distribution Growth Potential
Remains Intact: EQM is well positioned to drive long-term
distribution growth for the following reasons: (1) its parent, EQT
) has a large portfolio of mid-stream assets that can be dropped
down to EQM; (2) no direct commodity exposure with a large portion
of its cash flows based on fee-based contracts with remaining
weighted average life of ~9.5 years; (3) no debt on its balance
sheet supporting future financing requirements.
Main Catalysts/Risks to Our View: Risks to our outlook/TP
1) EQM's drop-down announcements are significantly above/below
our expected $200-250mm/year and/or 2) increased/decreased
visibility around its organic growth potential due to higher/lower
development of the Marcellus shale by producers.
Valuation: We derive our $30 target price by applying a
combination of three-stage distribution discount model (
), EV/EBITDA, and target yield, giving us a valuation range of
$27-32. Our $30 price target implies a yield of 5.1% in 2Q13
(payable nearly 12 months out) based on a forecasted annualized
distribution of $1.52/unit.