Midstream Deal Puts Gas Producer EQT In Higher Gear

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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 ( 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 ( EQM ).

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.

Working Assets

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."

Market Performance

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 ( RRC ), 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 counties.

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 geographical diversification."

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.

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

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

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