Analyst Actions: EQT Midstream Partners Downgraded To Neutral; Shrs Down 2.6%

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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 Corp ( 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 include:

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 ( DDM ), 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.



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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