EQT Midstream: Natural Gas Companies Have a Bright Outlook in the U.S.

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With the growing national attention towards the environmental and economic benefits of natural gas, Southern California Gas (SoCalGas), American Gas Association (AGA) and other partners recently released a few videos intended to stress the benefits of natural gas as a source of clean, plentiful and reasonably priced American fuel. Lately, EQT Midstream Partners, LP (NYSE: EQM) acquired EQT’s (NYSE: EQT) wholly owned subsidiary Sunrise Pipeline, LLC.

EQT Midstream Partners, LP is a growth-oriented limited partnership which owns, operates, acquires and develops midstream assets in the Appalachian basin.

The acquisition of Sunrise from EQT

EQT is an integrated energy company, with an emphasis on Appalachian area natural gas production, gathering, transmission, and distribution. The sale of its pipeline will lower the company’s assets and liabilities as the pipeline’s transmission and storage assets that were categorized and accounted for according to the GAAP guidelines for capital lease will be terminated. This will increase the company’s efficiency ratios which include asset turnover, return on assets and reduce its leverage ratios.

Besides this, the cash consideration of $507.5 million will provide the company with funds to expand into profitable areas where it holds maximum expertise, and retire some of its maturing debt in the upcoming years. The company will also be able to benefit from EQT Midstream’s growth as the consideration includes $32.5 million of common and general partner units.

<img alt="" src="http://g.fool.com/editorial/images/58546/1_large.png" />

Source: EQT Midstream Partners, LP - Presentations

EQT Midstream now owns the assets of Sunrise which includes a 41.5 miles 24-inch diameter pipeline. The pipeline holds a throughput capacity of roughly 400 BBtu per day, which is fully booked under 10 year fixed fee contracts. The partnership is also serving a firm’s contract for 305 BBtu per day capacity. EQT Midstream has also committed to provide 95 BBtu per day of capacity to third parties. These contracts will generate $44.3 million in firm reservation revenue and almost $0.7 million of firm usage revenue per annum, upon full capacity employment.

Sunrise is also currently in the process of expanding its Jefferson compressor station to add 550 BBtu extra volume per day. It is expected to be operational in April, 2014. The estimated total capacity is projected to be 950 BBtu per day. The expansion is also fully subscribed by a third party for a 20 year period. This agreement will generate $13.0 million firm reservation revenue per annum and nearly $1.0 million of annual firm usage revenue, under full capacity employment.

EQT Midstream expects the acquisition of Sunrise Pipeline to instantly increase the partnership's distributable cash flow per unit. Overall, the management has estimated to earn $40 million annual revenue by the year 2015, an annual increase of $0.27 per share. This is likely to result in additional net income of $7.82 million, assuming the current net profit margin of 19.56% reported by EQT Midstream in Q1FY13 is maintained. This will provide an increase in EPS of 7.16% per annum. The EPS is expected to rise to $0.80 by 2014 and $0.83 by 2015, from the current level of $0.67.

The deal has been financed by funds raised from common unit public offering and borrowing from EQT Midstream’s revolving credit facility.

Sempra Energy (NYSE: SRE) is also an energy services company and is likely to benefit from the overall rising demand of natural gas in the upcoming years. The company’s gas and electric company segment is involved in the generation, transmission, and distribution of electricity; and sale, distribution, and transportation of natural gas.

In May, Sempra, GDF SUEZ S.A., Mitsubishi and Mitsui put their signatures on 20 year tolling capacity and joint projects to encourage the development, financing and construction of a liquefied natural gas (LNG) export facility. These tolling contracts cover the absolute capacity of three trains of 13.5 million tonnes annual (Mtpa) facility. This will provide an export capability of 12 Mtpa LNG and the complete regasification capacity of 1.5 Bcfd. All tolling agreements serve 4 Mtpa. This will be recorded as one of the biggest venture in Sempra's history.

The total expenditure incurred on this facility is estimated to be roughly around $9-10 billion. Construction is anticipated to begin next year, with the first stage of liquefaction operations to start in the third quarter of 2017. By 2018, all three trains are projected to be launched commercially.

Furthermore, low income families will now receive a 20 percent rebate on their monthly natural gas bill. They will also be able to benefit from free energy efficient home up gradations under the California Alternate Rates for Energy (CARE), as per the revised income regulations. Approximately 1.7 million customers are entitled to benefit from this program. This is likely to boost the revenues of Sempra Energy as the demand for natural gas increases in multiple folds.


EQT midstream has acquired a company with very bright future prospects.The future cash flows from Sunrise are expected to increase substantially in 2014 and 2015, as the Jefferson compressor station expansion and related contracts materialize. These revenues are quite certain as the company has fixed-fee long term contracts with no commodity exposure. The company has immediately increased its cash distribution per unit by 8%. This trend is expected to continue. I would highly recommend buying and holding this company’s stock for the next few years to earn a higher return by assuming lower risk.

Sempra is also a good potential investment. The company has posted revenue growth, healthy cash flow from operations and superior price return during the prior year. It is likely to generate superior returns in the coming years as well as the public becomes more informed about the benefits of natural gas vehicles and shifts to utilizing natural gas to fulfill their energy needs. The CARE program is also a positive signal for Sempra. The tolling agreement will provide a significant boost to the company’s inflows in the year 2017 and beyond. The company also provides a regular income stream in the form of a rising dividend yield year-on-year. In 2013, the company is expected to raise annual dividends by 5%.

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