Like salmon, integrated oil and gas companies know a lot about
moving upstream, downstream and midstream.
In oil and gas, "upstream" refers to where exploration and
production are done; "midstream" is where the oil or gas is
transported, stored, processed and marketed; and "downstream" is
where it is refined and purified.
Like a lot of integrated oil and gas firms,EQT (
) used to handle all three stages of the process itself. That was
before it spun off its midstream assets into a separate, publicly
traded company calledEQT Midstream Partners (
EQT produces and distributes natural gas and oil to wholesale
and retail clients. It mostly operates in the Appalachian region,
though it recently made a move into Texas' Permian Basin.
Spinning off EQM in June 2012 freed EQT to focus on production
wells and other higher-return upstream assets, says SunTrust
Robinson Humphrey analyst Neal Dingmann. It also gave EQT access
to more capital because of its ability to sell, or "drop down,"
certain assets to EQM.
For example, on May 1, EQT sold its Jupiter natural-gas
pipeline system to EQM for $1.18 billion. The system was designed
to gather EQT's Marcellus natural gas production in parts of
Pennsylvania's Greene and Washington counties. The assets include
35 miles of gas-gathering pipeline and two compressor stations
with 21,300 horsepower of compression.
The upshot is a $1.18 billion deal immediately accretive to
EQT distributable cash flow per unit.
"They continue to raise a ton of money by dropping down these
assets -- money they can put toward expanding their operation,"
Dingmann said. "They've done an amazing job of taking those
midstream assets, moving them into a stand-alone stock and
growing both companies tremendously well."
JPMorgan analyst Joseph Allman recently pegged the Jupiter
system's estimated 2014 earnings before interest, taxes,
depreciation and amortization (EBITDA) at about $110 million. At
a sales price of $1.18 billion, EQT is selling Jupiter for 10.7
times its estimated EBITDA.
"This transaction appears modestly accretive to (EQT's) net
asset value," Allman noted. "The (stock) market probably will
view the sale as positive for EQT."
The stock market has been largely positive on EQT for some
time now. The company's shares have been trending higher since
the beginning of the year and touched an all-time high of 111.47
on April 24.
Though the stock has retreated some since then -- it currently
trades near 106 -- shares are still up about 18% for 2014.
Part of the stock price growth is attributed to EQT's recent
financial performance, which includes a five-quarter run of
double-digit or better sales and profit gains. This streak ended
a four-quarter spell of lower sales and earnings.
EQT's business model also appeals to Wall Street, analysts
say. When the company sells assets to its midstream partner, it
has immediate access to money that can be used to grow other
areas of the business.
"They'll typically add additional acreage or drill additional
wells," Dingmann said.
In one recent move to expand its operation, EQT announced
plans to exchange assets withRange Resources (
), a Fort Worth, Texas-based oil and gas producer.
That deal brought EQT 73,000 net acres in the Permian Basin
and 900 producing wells in Texas' Glasscock and Sterling
In return, Range Resources will get EQT's interest in 138,000
net acres and a gathering system in the Nora Field of Virginia,
giving it 100% ownership of Nora and $145 million in cash. The
transaction is expected to close this quarter.
In a May 6 note, Citigroup analyst Faisel Khan said the
rationale to divest the Nora field assets "makes sense since EQT
has not drilled any wells on this acreage in the last four years,
and these assets are likely more valuable to the buyer."
Khan also said that EQT agreed to do an asset swap instead of
an outright sale because "it is more tax-efficient and provides
EQT also said its board of directors OK'd a share-repurchase
authorization of up to 1 million shares. EQT will get net
proceeds of about $1 billion in the transaction, Khan said.
Financially, EQT is coming off its best quarter in years. On
April 24, it logged adjusted Q1 earnings of $1.35 a share, up
from 43 cents a year ago and well above estimates for 86 cents.
Revenue climbed 59% to $661.6 million, also above views.
Analysts polled by Thomson Reuters expect EQT to report
full-year earnings of $3.97 a share, up 71%. Annual profit is
seen rising 17% in 2015 and 32% in 2016.